Australia | Oct 31 2007
By Chris Shaw
While the Australian equity market continues to make record highs there comes a time when valuations take over and this appears to be the case for Boart Longyear ((BLY)) as the mining services company has today received two ratings downgrades. Both UBS and Credit Suisse have cut their ratings to Neutral from Buy/Outperform, citing recent share price outperformance as the main reason.
The stock has gained more than 40% over the past ten weeks, Credit Suisse noting in the past month alone the shares have outperformed the broader market by 12%. While the broker continues to like the longer-term outlook for the company, shorter-term it is concerned the market has gotten a little ahead of itself particularly with respect to estimates for margins.
Given the strong operating environment it sees scope for management to bring forward some costs involved in re-shaping the business more efficiently, which it would view positive but may result in some downward revisions to forecasts if it were to occur.
Having said that, the broker remains above consensus in terms of forecasts for both FY08 and FY09 and takes the view the rest of the market is under-estimating the potential for both organic and acquisition-led growth. On its numbers the company has around $400 million available for acquisitions, so there is significant scope for upside and this should maintain the group’s positive earnings momentum.
Also of note in the broker’s view is the fact the company has a neutral exposure to the stronger Australian dollar. It is forecasting EPS (earnings per share) of US10.5c this year and US14.6c in 2008, which it suggests puts it 11% above market consensus for next year.
By way of comparison UBS is forecasting EPS of US10c and US12c respectively and median EPS forecasts according to Thomson One Analytics are US11c and US14c.
The FNArena database shows following today’s rating changes the stock now scores five Buys and four Neutral recommendations, with an average price target of $2.68. At the same time as it downgraded its recommendation UBS has increased its price target to $3.00 from $2.65, the move reflecting increased valuations of peer companies.
Thomson One shows a median price target on the stock of $2.71. Shares in Boart Longyear today are little changed and as at 1.10pm were down 4c at $2.56, which compares with a range over the past 12 months of $1.80-$2.75.