Australia | Jul 28 2006
By Chris Shaw
DCA Group (DVC) has disappointed the market, as after long suggesting likely tender wins for some additional contracts in the UK it has reported it has missed out on completely on gaining any new contracts. This was enough to send the share price down sharply yesterday, the stock falling from around $2.60 to around $2.40.
The announcement has prompted JP Morgan to downgrade its rating on the stock to Underweight from Neutral, as in its view the outcome has the combined impact of removing a potential source of earnings upside and damaging the credibility of the management team.
It suggests the market will now focus on the poor rate of return the company is generating from its assets in the UK and the potential for improvement, with evidence of such improvement likely to be needed before the stock is re-rated.
Macquarie, which is also Neutral on the stock, agrees, suggesting the removal of a possible upside catalyst will force the market to look at the stock from a valuation viewpoint for the medium-term.
UBS agrees there are few obvious catalysts in the short-term, but suggests the market over-reacted in selling down the stock yesterday as at current levels negative earnings per share growth for FY07 is now being priced in. Given this is an unlikely outcome, the broker has maintained its Buy 2 rating, though its share price target has been trimmed to $3.17 from $3.37.
The FN Arena database shows the stock still receiving three Buy ratings, compared to one Accumulate recommendation, one Underweight rating and four Holds. It is worth noting, however, that not all the brokers to cover the stock have updated their views for yesterday’s announcement. The average target price according to the database currently stands at $3.13, while Thomson One Analytics notes the median price target is $3.43.
DCA Group shares as at 1pm today were trading 1c higher at $2.42.