Australia | Jul 24 2006
By Chris Shaw
The Infrastructure sector has not been a great performer of late, though with high yields available on a number of stocks in the sector it continues to attract positive recommendations from a number of brokers. For those who don’t want exposure to the likes of toll roads and airports there is another way to play the sector, this being through the companies that do much of the actual work for those developing new projects.
With this as a background UBS has initiated coverage on three companies with exposure to infrastructure-like operations and taken a positive view on the prospects of each given the likelihood of ongoing expansion and a corresponding uplift in earnings.
It rates Cardno (CDD) as Buy 2 with a price target of $5.20, noting the outlook for its primary business of engineering construction looks strong for at least the next two years.
Over the last few years it notes management has demonstrated an ability to integrate new acquisitions into its existing operations, which is important not only because it has made a number of such acquisitions recently but because it looks set to continue expanding given the highly fragmented industry in which it operates.
Factoring in additional expansion, the broker expects earnings per share of 33c this year, but sees this increasing to 38c in FY07 and 42c in FY08, which equates to a Price/Earnings (P/E) ratio of 13.6x earnings this year and 10.7x in FY08. This puts the broker ahead of median forecasts according to Thomson One Analytics, who sees earnings coming in at 30c this year, 35c in FY07 and 33c in FY08.
The FN Arena database shows while coverage of the stock is limited the view of the market is favourable, as it is rated as Buy by the three brokers who research it. The average price target is $5.48, while the median target according to Thomson One is $5.27. This compares to the broker’s valuation range of $5.00-$5.50 and a last closing price of $4.50.
Another stock the broker rates as Buy 2 is Macmahon Holdings (MAH), a mining and civil engineering contractors and earthmoving equipment hire company.
It sees all three divisions as offering a positive outlook while it notes the company itself has a strong order book and a growing stream of annuity type earnings that should translate into solid earnings growth. On the broker’s numbers, forecast earnings per share of 6c this year should increase by 34% to 8c next year and a further 23% to 10c in FY08.
It values the stock at $1.13, which is equal to its share price target and is set at a 10% discount to the market despite the strong earnings growth. Only one other broker in the FN Arena database covers the stock and rates it as Reduce. Tthe median price target according to Thomson One is $0.83, while its median earnings per share estimates are 6c this year, 7c in FY07 and 8c in FY08. The last closing price for the stock was $0.82.
The broker has also initiated coverage on Coffey International (COF) with a Neutral 2 rating based on a share price target of $3.30. It notes the company has strong positions in both the geotechnical and environmental services markets, both of which are fragmented and so offer opportunities for expansion.
Like Cardno, the company has made a number of acquisitions in recent years and it expects this trend will continue. Also positive in terms of future earnings is the strong civil construction cycle, which is benefiting the geotechnical operations in particular.
The broker is forecasting earnings of 19c this year, increasing next year to 23c and 25c and FY08, which would see its P/E ratio fall from a forecast 16.1x this year to 12.4x in FY08. The broker’s valuation range on the stock is $3.20-$3.50, while its target price is $3.30.
It is one of three brokers in the FN Arena database to cover the company, the others rating it as Buy and Hold respectively with an average share price target of $3.70. Thomson One lists the median earnings estimates for the stock as 18c this year, 21c in FY07 and 27c in FY08, meaning UBS’s forecasts appear conservative longer-term. The median price target according to Thomson One is $4.10, well above the last closing price of $3.05.