Australia | Jun 27 2006
By Chris Shaw
The Australian auto manufacturing sector has not been a happy one in recent years, with the collapse of Ion Holdings and ongoing difficulties at Pacifica (PBB). CMI Ltd (CMI) has also suffered as a result, the stock losing around one-third of its value in the past 12 months.
In ABN Amro’s view the market appears to be giving management no credit for diversifying the company’s operations, a move particularly important given the difficulties in passing on cost increases to customers. The market’s lack of belief in the stock has been more apparent during the recent market correction, which has seen the stock sold down enough to attract an ASX query.
Management responded by saying they knew of no reason for the fall in the share price and expected the profit result for FY06 to be within 15% of last year’s result, at the same time making no change to their previous guidance of a flat full year result when compared to last year. As a result, the broker has not adjusted its forecasts, which for this year is in line with management guidance at $11.4m, rising to $11.8m in FY07 and $12.2m in FY08.
Taking advantage of the recent share price weakness, the broker has upgraded its rating on the company to Buy from Hold on valuation grounds, as on its estimates the stock is trading on a forward P/E of about 5x and a yield of 11-12%, fully franked. This is simply too attractive in the broker’s view, as it suggests a yield of around 8% is closer to fair value and supports its target price of $1.50.
The company does suffer from a lack of coverage, as with a market cap of around $37m there is little reason for big investors to pay it much attention. As a result, ABN Amro is the only broker in the FN Arena database to research the company.
The share price has traded between $0.975-$1.70 in the past 12 months, with a last closing price of $1.03.