Australia | Aug 25 2006
By Chris Shaw
The last couple of months have been tough for DCA Group (DVC), as the company recently announced it was unsuccessful in bidding for some health contracts in the UK that had been expected to be major contributors to its projected growth, then yesterday the company disappointed with its profit result.
Profit of $75m was actually broadly in line with the market’s expectations, but as Deutsche Bank summarised in reviewing the result there are now few operational catalysts to justify buying the stock in the short-term.
The main issue stems from falling margins, with ABN Amro noting increased competition in the diagnostic imaging sector is forcing down margins at the same time as there is a squeeze from higher wages, which is not a good combination for earnings. Adding in the potential for margin contraction in the UK operations and its aged care businesses and it is easy to see why the broker and most of the market are scaling down estimates.
ABN has lowered its earnings forecasts by 8.4% in FY07 and 10.8% in FY08 to 14.8c and 15.7c respectively, which the broker sees as enough reason to cut its rating to Sell from Buy. UBS has also downgraded the stock but only to Neutral 2 from Buy 2, the broker also citing a weaker margin outlook as the main reason. Its new earnings forecasts are 18c and 20c, down 11.5% and 17% respectively. This compares to median earnings estimates according to Thomson One Analytics of 18c and 21c.
Merrill Lynch has made similar cuts to estimates, but cautions this might not be the end of the story as given the margin pressure looks likely to be sustained over the medium-term, further downgrades to forecasts remain possible.
ABN sees one potential area of upside in that management is considering options regarding their aged care properties, with a property trust being one possibility. While this would offer some longer-term growth potential, the broker points out there is unlikely to be any benefit in the shorter-term, so the margin outlook will continue to dominate.
The FN Arena database shows following overnight revisions to broker recommendations the stock is now rated as Buy twice, Neutral four times and Sell twice, though neither Credit Suisse or Aspect Huntley, who rate the stock as Buy, have upgraded for the profit result. The average price target is $2.78, while the stock today is trading down 12c at $2.58 as at 2.30pm.