There's a track winding back ... to your portfolio

We might all love our sunburnt country with its rugged mountain ranges and sweeping plains but these cherished geographic features pose just as many problems today as they did when the early settlers attempted to explore what lay beyond Botany Bay.

The rich mining areas of larger and less populated states - Western Australia and Queensland - are central to Australia's dominant position in the production of base and precious metals.

Similarly our fruits, grains and cattle industries are essential to our growth but are long distances from domestic markets and the port facilities required to tap into global markets.

The key to unlocking the true value that abounds in a country rich in natural resources - both above and below the ground - is an efficient transport system. Companies that operate in this sector can provide a good source of investment income.

Generally, the outlook appears bright for businesses that manufacture, distribute, maintain and service transport infrastructure and vehicles.

Australia has several listed companies that provide products and services for road, rail and water transport.

We analyse five companies that have large corporate clients and a significant proportion of revenue derived from government and semi-government authorities.

Despite the recent sell-off in some of their shares, their earnings predictability is relatively high, suggesting that there may be some cheap opportunities in this sector worth targeting.

AUSTAL

Between 2003 and 2007, boat manufacturer Austal's share price increased from 50cents to $4.

A key driver of Austal's success during this period was its fast ferry business, with the majority of sales to overseas markets such as Hong Kong, Hawaii and the Middle East.

The company was a success even without the strong sharemarket conditions and the awarding of multimillion-dollar contracts by the Australian and US navies.

Its vessels are used mainly for commuter transport; there is high demand from the tourism industry as larger and faster vessels maximise the income derived from coastal attractions and six-star retreats.

But investor confidence has been dented by uncertainty surrounding the US Navy's Littoral Combat Ship program and Austal's position as primary provider of some structural components to the program.

Consequently, analysts have revised their earnings estimates for the next two years.

Austal's investors are forecasted to pay $11 per dollar of earnings for the company - that is, a price-earnings ratio, or multiple, of 11 relative to its recent trading range. That ratio, which is low compared to the market's overall ratio of about 15, suggests that any downside has been factored in.

And the possibility of further fast ferry contracts may be a catalyst for a share price revival.

Such contracts may arise as water transport becomes an alternative in Australia, with relatively congestion-free rivers and harbours providing access to high-density, inner-city business precincts.

Ferries already operate in east coast capital cities and are strongly promoted in Western Australia where, this month in Perth, tickets to a Celine Dion concert, and West Coast Eagles' and the Western Force's games came with free ferry travel to and from the venues.

Transperth operates the government-owned ferry service and, given Perth's significant population growth, a decision to upgrade the service would not surprise.

Austal is a Western Australian-based company with its manufacturing facilities in Henderson, just south of Perth, and would be a frontrunner to benefit from any upgrade.

In Brisbane, recently elected Lord Mayor Campbell Newman made a pre-election promise to expand the CityCat fleet from 11 to 19.

Austal is Australia's only ASX-listed ferry manufacturer in an industry where there is limited competition and as a global supplier of fast ferries, it would have a competitive edge in tendering for the supply of ferries throughout Australia.

BRADKEN

Bradken provides maintenance and refurbishment services to the resources and freight rail industries and designs and manufactures freight wagons and trolleys, and draw-gear components.

It has 80 years of experience in the design and manufacture of freight trolleys (bogies) and, consequently, it has a large share of the bogie and freight wagon market in Australia.

The company's freight wagons are used to transport iron ore, coal and grain - all commodities that have a strong outlook.

In the six months to December 2007, Bradken's rail business accounted for more than $110million of group sales, representing about 30percent of the company's first half 2007-08 revenue.

There was a slight improvement in its profit margin, ahead of the company's other four divisions.

During the period, Bradken's share price halved after management announced a profit downgrade due to the below-expectations performance and cost blow-outs of its power and cement division.

There is no doubt that the subsequent fall in Bradken's share price from $15 to $6 was an over-reaction, exacerbated by weak sharemarket conditions.

Management's revised guidance still indicated earnings per share growth of 15percent in 2007-08, and consensus forecasts pointed to growth of 20percent. Given that the company's price-earnings ratio is about 12.5 relative to 2007-08 guidance, there could be a recovery in its share price, thanks mainly to its rail division.

Significant price increases for coal and iron ore suggest that production increases are likely. Improvements in alleviating port congestion should also result in larger volumes of coal being transported.

Meanwhile, the construction of new rail infrastructure at emerging iron ore production sites are another positive sign for companies such as Bradken.

In March, Macmahon Holdings awarded contracts to the value of $42million for the construction of rail infrastructure in Western Australia's Pilbara.

And in New South Wales, Whitehaven Coal's success in the Narrabri region has prompted it to increase its coal-carrying rail capacity from 11million tonnes to 15million tonnes a year in the short term, increasing to 25million tonnes a year in the medium term.

Whitehaven's existing rail agreements are with Pacific National, a group that uses a fleet of 2350 wagons and 100 locomotives to transport more than 80million tonnes of coal a year.

The Federal Government is considering an inland rail link that would provide access to the Port of Brisbane.

Such a link would help to relieve port congestion and transport limitations in New South Wales, benefit coal and other industries and result in an expansion in the rail fleets of operators such as Pacific National and service providers such as Bradken.

COOTE INDUSTRIAL

Within 12 months of technical and logistical solutions provider Coote Industrial listing on the ASX in December 2006, the company's share price hit $3, a premium of 200percent to its float price of $1.

But despite the fact that Coote exceeded prospectus forecasts and has since paved the way for a very strong 2007-08 performance, investors have abandoned the company.

Coote's share price is hovering in the vicinity of $1, which is difficult to justify given that net profit for 2007-08 is expected to be more than double that achieved in 2006-07.

Indeed, Coote's fundamentals speak for themselves.

The company's P/E ratio relative to 2007-08 consensus earnings forecasts is less than six and a yield of about 10percent is on offer based on Coote's recent trading range and dividend estimates for 2007-08.

Coote is leveraged to the transport boom in many ways. When the company listed on the ASX it was a diversified engineering logistics and manufacturing business.

Its engineering division includes Hedemora Diesel, a long-standing provider of premium diesel engines for locomotives, cargo vessels, ferries and naval defence vessels such as submarines.

Coote's engineering division is complemented by PC Diesel, a contractor to large resources companies involved in land-based and marine exploration and production activities. The engineering division performed well in 2006-07, accounting for more than 60percent of sales, but Coote has focused on expanding its rail services business since listing on the ASX.

Two important acquisitions, South Spur Rail Services and Gemco Rail, are expected to contribute revenues of more than $150million in 2007-08 and to account for more than half of management's forecasted profit of $19million.

Coote's customers include Pacific National, Australian Railroad Group and the Australian Rail and Track Corporation.

Inspection maintenance and repair revenues account for a significant proportion of Coote's income, providing the company with improved earnings visibility.

MAXITRANS INDUSTRIES

Maxitrans Industries manufactures and distributes large trailer and tipper bodies used in the transport of bulk goods.

The company's trailers are used to transport fresh produce, food and beverages, building and construction materials as well as a range of natural resources.

The drought has stifled demand for Maxitrans trailers used to transport agricultural goods, but management says it is already seeing a positive impact from recent rains.

Compounding Maxitrans' problems over the past two years has been the less than smooth integration of some of the acquisitions it made in 2003 and 2004.

But the company has resolved these issues and is poised to achieve a record profit in 2007-08.

The company's half-year profit of $7.7million, representing earnings per share of 4.5cents, puts it in good shape to achieve analysts' recently upgraded full-year earnings per share consensus forecasts of 9.1cents.

This reflects a P/E ratio of approximately seven based on Maxitrans' recent trading range - a dividend yield of more than 8percent is also on offer.

The increased output of trailer brands Maxi-Cube, Freighter, Lusty EMS, Hamelex White and Peki all featured in Maxitrans' turnaround in the past six months.

The positive trend is expected to continue as improved efficiencies and an increased manufacturing capacity meet a surge in the company's order books.

UNITED GROUP

United Group is a big player in the transport industry.

Its rail business encompasses Goninan, a long-standing designer and manufacturer of rail rolling stock and Alstom, a specialist in providing engineering, maintenance and electrical systems.

United has also established important alliances with GE Transportation and Mitsubishi Electric that have provided it with the expertise and capacity to take on large projects.

United and its alliance partners have delivered more than 500 rail cars for use in the inner and outer suburban areas of Sydney.

The company's rail division has provided various types of rail locomotives and cars for use in Victoria and Western Australia, and manufactured more than 200 locomotives for Pacific National, Queensland Rail and Pilbara Rail.

In the first six months of 2007-08 the division achieved revenues of more than $500million, resulting in a 154percent increase in earnings before interest and tax to $36.3million.

During the same period, management announced the receipt of more than $500million in new orders for resources-related activities.

These included locomotives as well as coal and iron ore wagons for key customers such as Queensland Rail, Rio Tinto and BHP Billiton.

As at December 31, the rail division's order book was more than $1.7billion, up from $1.4billion in the previous corresponding period - an increase of nearly 20percent.

United's management has strengthened its rail transport business in Hong Kong and entered India's freight market.

The company has felt the full impact of the market downturn with its share price halving from almost $22 to less than $11 between November 2007 and February 2008.

The company's property services interests in the United States would be creating some level of doubt among investors.

Consequently, it may be United's traditional rail business that provides a much-needed lift.

A BETTER WAY TO MOVE PEOPLE

NEW roads, tunnels and bridges are part of the strategy to improve city, regional and rural transport, but there is a growing emphasis on the need to improve public transport. This is particularly apparent in capital cities where commuting by car is becoming increasingly untenable. More buses, an expanded rail network and new trains are either in the pipeline or on the drawing boards. The increased use of fast ferries, a common form of transport overseas, is also seen as a practical measure, as most capital cities in Australia have river access to the central business district.

New road and rail networks are being developed to meet the needs of rapid population growth in regional areas such as eastern coastal areas and the booming south-western corner of Western Australia. Development of the Pilbara in Western Australia and the coal mining regions of the Bowen Basin in Queensland and Narrabri in New South Wales has triggered extensive improvements in transport infrastructure.

There is also growing demand for improved road and rail bulk haulage networks and an expansion of truck and train fleets. This will include new locomotives, carriages and wagons.

The mining boom will account for much of the transport development but improved seasonal conditions and drought relief are expected to boost sales of trucks and trailers. In February, the managing director of Maxitrans Industries, a manufacturer and distributor of road transport trailers, suggested that recent rains should create increased demand for the company's products.