Australia | Feb 18 2008
By Chris Shaw
As earnings results of mixed quality continue to flow through to the market it is those companies meeting or exceeding expectations that offer the best chance for share price outperformance.
This is reflected by both ABN Amro and Merrill Lynch retaining their Buy ratings on Nomad Building Solutions ((NOD)), which supplies portable housing primarily in remote locations such as mine sites.
The group matched market expectations with a 47.5% increase in interim profit to $10.4 million, a result in line with both broker’s forecasts and one that allowed management to reiterate full year earnings guidance of between $22.4-$24.1 million.
The only issue with the result was negative cash flow from operations but both brokers stressed this was a timing issue relating to variations in outstanding contracts and delays in customer payments.
ABN Amro expects the current half year should see this situation corrected, which in its view implies a strong growth in cash flows in the coming six months. Merrill Lynch agrees, noting the stock is a second half story.
While full year guidance suggests solid growth ABN Amro expects this to continue into FY09, forecasting group revenue next year of around $400 million, which compares to the $145 million achieved in 1H08. There is little downside risk to this estimate in the broker’s view as it notes more than 50% of revenue has already been contracted.
Merrill Lynch also likes the longer-term outlook given ongoing strength in the resource sector, while additional growth options are also available as evidenced by the recent acquisition of Rapley Wilkinson.
While remaining positive the broker has revised its earnings forecasts down modestly to reflect the impact of option expenses and higher depreciation expenses. The result is a reduction to its estimates of 7.7% in FY08 and 7.5% in FY09, leaving its earnings per share (EPS) forecasts at 20.2c and 24.5c respectively. This compares to ABN Amro’s unchanged forecasts of 20.7c and 26.4c.
Where ABN Amro has made a change is in its price target, as to reflect the market’s current volatility and a de-rating of the sector in general it has adjusted its 12-month target to $2.84 from $3.64 previously. Merrill Lynch has not changed its $3.40 target, which it suggests equates to a P/E (price to earnings ratio) of 9.1x in FY09. ABN Amro’s revised target implies a P/E of around 13.7x in FY08, which it suggests is closer to peer multiples.
The brokers are the only two to cover the stock in the FNArena database but as a means of comparison Thomson One Analytics shows a median price target on the stock of $3.22, while median EPS forecasts are 20c and 25c.
Shares in Nomad today are slightly weaker in line with the overall market and as at 12.25pm were down 8c at $2.12, which compares to a trading range for the past 12 months of $1.80-$3.40.