Australia | Sep 29 2006
By Chris Shaw
As metal prices show some signs of stabilising after recent weakness the mining sector has come back into favour, as evidenced by BHP Billiton’s (BHP) more than $1.00 increase from its recent lows.
But what is good for the mining sector is also good for the companies that service the sector, with Intersuisse stressing again it sees potential for WorleyParsons (WOR) to enjoy a bounce in the short-term from what the broker suggests are oversold levels.
Since reporting earnings last month the stock has been in near freefall, dropping from above $20.00 prior to its profit result (which was a record at $139.1m) to a price of just over $15.00, recovering with the stronger market over the past few days to trade above $16.60.
Also helping in recent sessions has been news the company has entered a joint venture in India, which the broker expects will likely prove to be a good pipeline for new contract opportunities in coming years, offering a relatively low-risk exposure to a potentially high growth market.
The broker also notes management has been busy in recent days presenting to investors, which is likely to increase the market’s level of confidence in the sustainability of the company’s earnings growth.
This growth potential is significant, Intersuisse estimating from a base of 67.9c in FY06 the company’s earnings per share (EPS) are forecast to increase to 87c in FY07 and 104.8c in FY08. UBS also covers the stock and has similar earnings growth estimates, tipping EPS in FY07 of 86.8c and in FY08 of 112.2c. Such an outcome would equate to a Price/Earnings ratio of around 19x for FY07 and 15.8x for FY08, which looks attractive given the earnings growth profile.
Management’s recent presentations have also stressed the growth should be sustainable, as CEO John Grill points out recent contracts have had the effect of lengthening the group’s revenue profile such that more than 60% of total revenues are from contracts of more than three years in length.
Helping in this regard is the company’s scope, as it now has more than 14,000 employees around the world offering service in the Hydrocarbons, Power, Minerals and Metals and Infrastructure sectors, Intersuisse noting the outlook for all these sectors is currently favourable.
As a result, the broker suggests the combination of strong levels of work on hand and the potential to enter new markets and win new contracts will support the company’s earnings for several years, so it expects the share price to quickly challenge recent highs of about $23.50.
The FN Arena database shows WorleyParsons is rated as Buy three times, with two Accumulate ratings and one Hold. The average share price target is $22.46, while Thomson One Analytics median price target is $22.50, suggesting many in the market share a similar view to Intersuisse.