Australia | Mar 05 2008
This story features BRAMBLES LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Chris Shaw
Following management’s second earnings downgrade in the past three months shares in Asciano ((AIO)) have been harshly dealt with by the market, to the extent the stock has fallen more than 65% in the past seven months.
As Citi noted in reviewing the latest earnings downgrade the share price weakness is simply the market showing it no longer believes the embedded growth story it had previously allowed for, which puts the emphasis on management to prove such growth is achievable if it wants to see the share price re-rated higher.
One element of earnings to become clear in the latest update according to Merrill Lynch is that they are far more cyclical than previously thought, which is not an ideal attribute for an infrastructure stock particularly as JP Morgan points out cash flow coverage won’t be strong until FY12 at the earliest thanks to increasing interest costs and high levels of capital expenditure.
This doesn’t appear to be cause for concern in terms of the company’s viability going forward as Citi notes the group’s balance sheet still has 15-20% headroom before any lending convenants become restrictive, but it does have the effect of forcing brokers to again lower earnings estimates.
Due to the structure of the group EBITDA (earnings before interest, tax, depreciation and amortisation) is the most instructive measure for the company’s earnings outlook and across the market forecasts have been cut. Citi has dropped its EBITDA forecasts by 3% in FY09 to $682.4 million and in FY10 by 19% to $700.8 million, against its expected $646.3 million outcome for FY08.
By way of comparison JP Morgan is forecasting EBITDA of $616 million in FY08, $683 million in FY09 and $778 million in FY10, while Merrill Lynch is at $650 million this year and $683 million in FY09.
The issue for Macquarie is while the stock’s valuation doesn’t look bad given it is trading on 11 times EV/EBITDA the group’s net debt to EBITDA is above management’s preferred ratio and so will constrain the company’s operational flexibility to some extent and cause some concern for investors, particularly in the current environment.
Even factoring in the proceeds of the sale of the group’s stake in Brambles ((BXB)) will not help much on the broker’s numbers, so it expects the market will remain sceptical of the group for some time. As a result the broker has downgraded its rating to Underperform from Outperform.
JP Morgan has stuck with its Hold rating post the update given it sees any improvement in the group’s situation as taking a long time to flow through, while it notes there remains some earnings risk from any downturn in import container volumes or cuts to distributions.
GSJB Were also rates the stock as Hold but the rest of those in the FNArena database covering the stock ascribe it Buy ratings, Citi noting even allowing for the latest downgrade to its growth estimates its target price is above $5.00 ($5.01 compared to $9.40 previously) and this is well above the current share price of less than $3.75.
UBS points out the value on offer in the group means there is some corporate appeal, but the high gearing and relatively complex nature of earnings that make forecasting difficult will temper some of the valuation-based enthusiasm.
Of the brokers to revise numbers post the revision to guidance the broker remains the most aggressive with its price target of $7.70, while Citi is the most conservative with its $5.01 target. Deutsche Bank has not yet updated so its price target from December is the highest in the database at $9.50 while the average price target is $7.12, down from $7.67 prior to the update and $8.47 as at the end of February.
Shares in Asciano have continued to slide in trading today and as at 11.40am were down 8% or 32c at $3.67.
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