Taking The Bang Out Of Boom

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This story features DOWNER EDI LIMITED, and other companies.
For more info SHARE ANALYSIS: DOW
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

It was a tough FY07 for crane hire company Boom Logistics. Apart from having reached somewhat of a peak in its acquisition program, Boom fell victim to simple weather problems. However analysts had been pleasantly surprised by the ultimate FY07 result, all things considered. It couldn’t get much worse, could it?

As a provider of lifting solutions for industrial maintenance, construction and mining, Boom’s fortunes really should be booming in the current environment. However, aside from some trouble with the weather, Boom is suffering for the same reason as others in the lucrative coal market. Rail and port infrastructure constraints are slowing up Boom’s opportunities in the coal mining areas of the Bowen and Hunter Valleys, just as surely as they are hampering the revenues of the miners themselves. Coal represents 15% of Boom’s business.

As UBS points out, exactly the same problems are being experienced by Downer EDI ((DOW)), Macmahon ((MAH)) and Emeco ((EHL)).

Boom has also taken quite a hit on depreciation and amortisation, having forked out significantly to upgrade its crane fleet and add to equipment for hire. And then there’s the competition. And the rising costs. Over the course of 2007, Boom has downgraded its profit forecasts four times. The once high-flying stock has lost more than half its value since the beginning of 2006.

Which is one reason brokers have tended to remain positive, but patience is wearing thin. Macquarie buckled this morning and dropped Boom to Neutral, leaving the stock with a 4/2/0 B/H/S ratio in the FNArena database. For the persistent Buy raters, it’s hard to downgrade now as the stock plummets toward $2.00. Value is surely emerging.

Macquarie concedes this fact, but is also concerned about the stability of the company’s earnings in the near term. For one thing, this year’s cyclone season is predicted by experts to be worse than the last.

Management’s guidance of a $17-18m first half profit represents a drop of 8-13% below the previous corresponding period. Analysts have responded by reducing their own forecasts by around 5%. Management suggests the second half will be more favourable given the costs forked out in the first half for acquisitions, but analysts are preferring to be cautious on that front. Boom could use some further acquisitions to support earnings, but the company’s high level of gearing makes that problematic.

Despite the gloomy outlook, today’s target price reductions resulted in a move down from $3.38 to $2.94. That’s still a good 90c above where Boom is trading today. Citi points out that with a price/earnings of 10x, Boom must surely start looking good to a private equity buyer, if those still exist.

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