Australia | May 30 2007
By Chris Shaw
Last week Credit Suisse cut its estimates for Emeco Holdings (EHL) and downgraded the stock to Neutral from Overweight on concerns over the company’s earnings outlook given adverse currency movements and some operational issues.
At the time FNArena noted Citi was sticking to its view there were no reasons to be concerned with the outlook for the company, the broker reinforcing its Buy rating and top of the range (at least according to the FNArena database) price target of $2.45.
Since then the case for those taking the view the company offers more downside than upside to earnings has grown as both JP Morgan and UBS have cut their earnings forecasts and in the case of JP Morgan their rating, matching Credit Suisse by downgrading the stock to Neutral from Outperform.
UBS has retained its Buy 2 rating but cut its forecasts for FY08 by around 5% to $91m, or 14c in EPS (earnings per share) terms. The change reflects a lowered assumption for capital expenditure on both FY07 and FY08, which impacts on earnings given the company’s business model revolves around spending to buy equipment and then leasing it out on a contract basis.
It suggests capex levels are actually more important in determining earnings than machinery utilisation levels, as this tends to be fairly constant over time. So assuming the company spends less, and this appears likely given the company’s contract at the Tarong mine is being cut back thanks to a lack of water, a scaling back of forecasts seems appropriate.
JP Morgan’s view is similar as it too notes the strength in the Australian dollar is unfavourable for the group’s earnings, while operational issues in terms of delays in deploying equipment mean there is now virtually no chance of any upside surprise to earnings for the current year.
The broker estimates the currency impact in EBITDA (earnings before interest, tax, depreciation and amortisation) terms could be as high as $3.5-$4.5m, a not inconsequential sum given the company is guiding to a net profit for FY07 of around $70m and EBITDA is forecast to be in the order of $215m.
Management has not given any guidance for FY08 but the broker takes the view the recent cyclones in Western Australia and slowdowns in both Queensland and Indonesian projects are putting downward pressure on utilisation rates, which may bring gearing levels into question given the “buy first, deploy later” business model.
On its forecasts the company is likely to spend almost $290m on capital investment and acquisitions this year and a further $290m in FY08 for a debt to equity ratio of 76% by the end of next year.
Given such an outlook the broker has cut its FY07 earnings per share forecast to 11.1c from 11.8c previously, while in FY08 it has reduced its estimate to 14.3c from 15.5c. In contrast, Citi is forecasting 12c and 15c respectively, while median estimates according to Thomson One Analytics are now 11c and 14c, against 12c and 15c last week.
The FNArena database shows the general view remains favourable to the stock given it is rated as Buy five times against the two Neutral recommendations, but in the past week the average price target has come down to $2.13 from $2.22.
The market appears to be taking the view discretion is a better part of valour, as over the past week the stock has lost around 15c from levels of around $1.75. The stock today is down 1c at $1.60 as at 12.30pm.