QR National. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA QRN AU Price (at 05:10, 21 Nov 2012 GMT) Outperform A$3.48 Volatility index Low 12-month target A$ month TSR % Valuation A$ - DCF (WACC 8.2%, beta 1.0, ERP 5.0%, RFR 5.0%) 4.12 GICS sector Transportation Market cap A$m 8, day avg turnover A$m 24.7 Number shares on issue m 2,425 Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 3, , , ,431.2 EBIT m Reported profit m Adjusted profit m Gross cashflow m , , ,119.5 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x QRN AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, November 2012 (all figures in AUD unless noted) 21 November 2012 Macquarie Securities (Australia) Limited Tough Q1, Oct showed signs of growth Event QRN, at its AGM, reiterated its broader haulage target of mt for FY13, with first 4 months at -1%, with Qld -4% and NSW +15%. Track volumes for first 3 months in Qld were -1.5%. QRN indicated redundancies of 820 instead of 750, which lifts workforce turnover to 17%. Capex is unchanged at $1.1bn. Freight growth was +2%, driven by Iron ore up 75%. Impact Q1 was anticipated to be a tough quarter, particularly as August was materially down on pcp. However, October was a strong month with volumes increasing to 6% across the major ports. Likewise, November is also looking solid with indications of strong performances in the Goonyella corridor. Thus the trend of negative growth in Queensland is likely to soften. However, we doubt it will be enough for QRN to meet its targets with our expectation unchanged at 189mt hauled. Below rail performance appears sound, with the exception of the GAPE where there is little ramp-up. Operating performance is likely to be sound. Below rail variance is lower than last year, thus the shortfall should be lower, and the higher labour reduction will start to deliver dividends in the second half. Additionally QRN has benefited from the WA grain contract continuing past its expiry date as timing of delivery of new equipment for CBH has taken longer. This has delayed any earnings step-down. Growth outlook remains broad, however we see delays. WICET is still 12 months away, Atlas feasibility delayed 6 months, and given the broader environment, projects like Galilee and Bowen are likely to take longer. As a result, FY13 is likely to be peak capex, before tailing off to a steady-state business by In such an environment, pressure of the appropriate leverage will continue. QRN continues to have ~$0.8bn of unused balance sheet capacity, just associated with the regulated assets. Earnings and target price revision FY13E PAT has increased 4.6% as we factor in higher cost saves, additional revenue from flood recovery and additional gain profitability. FY14E increases +2.8% through cost saves and FY15E declines 4.2% as we delay the start up of WICET 6 months. Price catalyst 12-month price target: A$4.10 based on a DCF methodology. Catalyst: Blackwater electrification decisions and contract renewals by BHP and Xstrata (Rolleston) Action and recommendation QRN s main attraction remains the regulated business, which is 51% of the earnings. Regulated assets continue to trade at x, which leaves the unregulated at an 8.5x EV/EBIT FY13 and ~7.3x FY14, compared to AIO s at 9.9x. Our target price is unchanged at $4.10. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 QR Network best indicator of the 1 st quarter environment QRN did explicitly report its below rail volumes, but last week they reported the quarterly performance of the below rail system. Q1 volumes ex GAPE were down 3.2%, and inclusive of GAPE, 0.7%. Whilst the Goonyella corridor was up 0.4mt (1.7%), given contract shifts to AIO and BHP strike activity QRN growth would have been materially lower than average. In Newlands, the growth in the GAPE offset softness in the Newlands system. The drag for QRN was the soft performance in Blackwater/Moura systems. However, on a below rail perspective the system target is 186mt. To achieve this target the system needs to grow at ~17%. At this stage we doubt this can occur. Our expectation remains at ~176mt for non GAPE volume, which implies growth of ~8%. The monthly system growth was 4% in September, 6% in October and industry commentary suggests better growth of 8-10% in November. Thus, the trend is supporting a recovery in the second half, barring any unforeseen weather events. Fig 1 QR Network performance 1Q11 2Q11 3Q11 4Q11 FY11 1Q12 2Q12 3Q12 4Q12 FY12 1Q13 Sep Dec Mar Jun Sep Dec Mar Jun Sep NTK Blackwater Goonyella Moura Newlands GAPE Total NTK % chg -25.4% -19.1% -16.3% 6.2% 34.9% 5.5% 4.4% -0.9% EGTkm Blackwater Goonyella Net Tonnes 1Q11 2Q11 3Q11 4Q11 FY11 1Q12 2Q12 3Q12 4Q12 FY12 1Q13 Blackwater Goonyella Moura Newlands GAPE Total NT % chg -25.2% -23.0% -16.0% 3.0% 23.9% 5.6% 1.6% -1.5% Regulated forecast Port Volume Difference to port Train Path (ex gape) 68.5% 56.6% 49.2% 56.1% 58.0% 57.2% 55.8% 41.1% 45.3% 49.3% 49.7% Maintenance train paths 1,590 1,683 3,066 2,674 9,013 1,746 1,558 1,183 1,664 6,151 2,854 % chg 121% 68% 10% -7% -61% -38% -31.8% 63.5% Source: Company data, Macquarie Research, November 2012 For investors the low volume is likely to see the take-or-pay contracts increasingly provide support for the below rail. This is demonstrated in the last two years, where volumes missed by 21% in FY11, yet the revenue variance was 7%. In FY12, the variance was even smaller, with 17% volume variance translating into only a 2% revenue variance. As a result, with an anticipated variance of only 5%, we expect QRN will miss revenue by only 1 2%. Offsetting the revenue variance during the quarter was the fact that QRN had its flood recovery costs approved, which will be recovered from September this year. The latter adds $8m to revenue and profitability. Dominating the below rail business are 2 issues: Blackwater electrification recovery. Whilst the issue is neutral to QR Networks, it does potentially change the competitive landscape for QRN s above rail business. A preference away from electricity increases QRN s obsolescence risk associated with electric fleet in the Gonnyella and Blackwater corridors. Regulatory framework. UT4 submissions should be in the coming six weeks. QCA approach around WACC is likely to be a large swing factor in the earnings. Broadly given limited coal loader expansion, expenditure in the existing systems is likely to shift back towards zero. 21 November

3 QR Coal when 4 months equals a quarter QRN provided 4 months numbers instead of quarterly numbers, with overall growth down 1%. This compared to Asciano, which reported three-month growth of 9.4%. The AIO growth appears strong, reflecting contract wins from QRN and a faster growing Hunter valley region. Using the port numbers as a proxy for the industry over four months: QRN contracted 4% compared to the port growth of 0.5%. This arguably flatters QRN s numbers as they have benefits from a strong turnaround in BHP performance in October (Hay Point up 1mt). Nonetheless, the soft growth is consistent with our expectation that the loss of the Anglo contract would see QRN under grow the industry. Whilst the first 4 months were tough, the underlying trend is encouraging in Queensland with industry growth improving from -8% in August to +6% in October. Industry sources have suggested the trend is continuing in November, with some coal chains growing 15-20%, with industry increasing from -8% to +6% between August and October. Fig 2 Coal Volumes mt QLD Haulage volumes (cumulative) % chg mt HVCC Haulage volumes (cumulative) % chg on 2011 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% % chg on 2012 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Source: Company data, Macquarie Research, November 2012 Hunter Valley growth at 15% is consistent with our expectation. QRN has capacity to haul ~40mt in Hunter Valley with its current fleet. The 15% growth suggests QRN will reach volume of 38-40mt in FY13, namely their fleet capacity. At this stage, a step change in growth will reflect the timing of BHP, Peabody expanding their positions in NSW. Broadly the industry is expected to grow towards 150mt in FY13, before it plateaus, with timing around track and port capacity becoming the bottlenecks to further growth. Like with Queensland, the pace of growth does not appear to have slowed, with November volume running at ~147mt pa. In the near term, some hiccups are occurring, with HVCC having a partial maintenance shutdown, losing 4 days, and in Queensland QRN derailing a train on the Moura line, which is likely to impact its volumes as track repairs are completed. Can QRN hit the mt guidance? We do not think so. Guidance has softened to the lower end ie 195mt, our expectation remains ~189mt. Put in perspective, if the current run rate is maintained, second-half growth will need to be 12% and given Hunter Valley growth has neared its peak, Queensland growth will need to be 14%. Our expectation is for industry growth in 2H/13 in Queensland of only 9%, and QRN gain from BHP recovery is arguably offset by the ongoing effect of Anglo market share loss. Our expectation implies a more moderate growth of 5-6%. Possibly the swing factor is the GAPE and volume increasing. At this stage, with the system under-utilised, our expectation is GAPE will be the least preferred option for miners. Growth in this corridor is more like an FY14 and FY15 event. 21 November

4 Freight/Bulk Overall 4 months performance was +2%. Within these numbers iron ore volume increased 75%, albeit this was well-flagged by management at the final result. Underlying performance was more moderate namely: Intermodal growth was marginally up <1%. This is similar to AIO performance for the quarter. Given growth of 4-5% on the east-west corridor, a soft north-south corridor is dampening growth. It arguably highlights market share is steady within the market, which may bring some additional pricing stability. Bulk volumes were down 1%. We had anticipated volumes to decline reflecting the loss of the CBH contract to Watco. The pace of the wind down of the contract has been slower than expected. It was originally schedule for 4 th quarter However, as trains have taken longer to arrive, QRN has been continuing to haul grain volume. Given CBH predicament, we expect QRN margins have increased, such that the profit impact to date has been minimal. The effect of the grain loss will occur in the December quarter and 2 nd half. QRN is hopeful that deregulation will allow new grain handlers in the market, and with excess fleet, it is a natural opportunity to expand. The rapid growth in Iron Ore is positive but well flagged. Moreover, given take-or-pay arrangements, QRN was capturing part of the value of the additional fleet prior to haulage of volumes, thus EBIT growth is likely to be in the ~60% for FY13. Cost savings running slightly ahead of schedule QRN indicated employee departures were a further 820 people, above the targeted 750. This increases staff departures to 1,480 since IPO, some 17% of the original work force. Staffing numbers we expect will again commence to track up, reflecting growth associated with new business opportunities. Given the outlook, we see a hiatus in growth. 21 November

5 Fig 3 QRN Fundamentals QRNational Year end June Valuation QR Network $m 5,070 5,791 6,180 6,597 6,585 6,533 6,460 6,328 6,153 5,959 Coal Haulage $m 3,985 4,169 4,285 4,386 4,357 4,287 4,180 4,125 4,085 4,063 Freight $m 797 1,078 1,252 1,245 1,266 1,262 1,238 1,204 1,158 1,098 Overheads $m Net debt $m ,103-2,418-2,442-1,981-1,502-1, Valuation $m 8,584 9,402 8,806 9,310 9,770 10,146 10,265 10,282 10,214 10,057 per share $ WACC % 8.7% 8.2% 8.2% 8.1% 8.1% 8.1% 8.1% 8.0% 8.0% 8.0% Cost of equity % 11.6% 10.5% 10.1% 10.4% 10.7% 10.7% 10.7% 10.7% 10.7% 10.7% Profit & Loss Total Revenue $m 3,245 3,742 3,996 4,244 4,431 4,484 4,579 4,811 4,976 5,137 Growth % 11.8% 15.3% 6.8% 6.2% 4.4% 1.2% 2.1% 5.1% 3.4% 3.2% QR Network $m Coal Haulage $m Freight $m Overheads $m Pre one offs EBITDA 813 1,048 1,349 1,351 1,476 1,589 1,621 1,709 1,779 1,815 One offs $m EBITDA $m 652 1,057 1,267 1,351 1,476 1,589 1,621 1,709 1,779 1,815 Margin % 25.1% 28.0% 33.8% 31.8% 33.3% 35.4% 35.4% 35.5% 35.7% 35.3% Depreciation $m EBIT $m ,007 1,034 1,116 1,181 1,212 EBIT (Recurring) $m ,007 1,034 1,116 1,181 1,212 Net Interest $m Profit Before Tax $m ,062 1,100 Tax Expense $m Tax Ratio % 370% -20% -29% -29% -29% -29% -29% -29% -29% -29% Net Profit After Tax $m (ex one offs) $m EPS (excl one offs) Growth 81.5% 27.1% -1.9% 10.1% 17.6% 0.2% 8.6% 7.4% 3.5% PE x P/CF x DPS Franking % 0% 0% 97% 100% 100% 100% 100% 100% 100% 100% Yield % EV/EBITDA x EV/EBIT x Net Debt : EBITDA x Net Debt 686 1,103 2,418 2,442 1,981 1,502 1, RAB $m 4,169 5,002 5,485 5,913 6,089 6,111 6,126 6,084 6,034 5,975 EFPOWA m 2,440 2,440 2,263 2,137 2,137 2,137 2,137 2,137 2,137 2,137 Cashflow Schedule Operating Cash Flow EBITDA (inc associates) $m 652 1,057 1,267 1,351 1,476 1,589 1,621 1,709 1,779 1,815 Net Interest Paid $m Tax Paid $m Other (dec Working Capital) $m Net Operating C/flow $m ,014 1,024 1,137 1,250 1,256 1,270 1,329 1,359 Investing Cashflow Capex & Acquisitions $m -1,350-1,197-1, Divestments $m Other $m Net Investing C/flow $m -1,311-1,152-1, Financing Cashflow Dividends $m Debt Changes $m , Net Financing C/flow $m Net Cashflow $m Balance Sheet Assets Cash $m ,176 1,655 1,951 2,157 2,314 2,416 Total Assets $m 9,162 10,020 10,769 11,417 11,783 12,146 12,196 12,240 12,271 12,286 Total Liabilities $m 2,170 2,726 4,289 4,677 4,795 4,933 4,972 4,970 4,968 4,967 Total S/holder Funds $m 6,992 7,294 6,481 6,741 6,989 7,213 7,225 7,270 7,303 7,320 RoFE 4.8% 7.0% 9.2% 8.9% 10.0% 11.6% 12.3% 13.5% 14.5% 15.0% RoE 5.0% 6.0% 6.9% 7.3% 7.8% 8.9% 8.9% 9.6% 10.3% 10.6% Net Debt:Equity 9.8% 15.1% 37.3% 36.2% 28.3% 20.8% 16.7% 13.7% 11.5% 10.1% Net Debt:RAB 16.5% 22.0% 44.1% 41.3% 32.5% 24.6% 19.7% 16.4% 14.0% 12.4% Source: Company data, Macquarie Research, November November

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 Sept 2012 AU/NZ Asia RSA USA CA EUR Outperform 50.00% 56.85% 61.54% 41.38% 63.19% 44.15% (for US coverage by MCUSA, 7.35% of stocks covered are investment banking clients) Neutral 36.62% 25.14% 27.69% 52.13% 30.77% 30.57% (for US coverage by MCUSA, 9.31% of stocks covered are investment banking clients) Underperform 13.38% 18.02% 10.77% 6.49% 6.04% 25.28% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Limited. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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