Brokers Remain Positive On Candle

This story features CONDOR ENERGY LIMITED. For more info SHARE ANALYSIS: CND

By Chris Shaw

With Australia’s unemployment rate at record lows it would seem a good time to be in the recruitment industry but a profit warning from Candle Australia ((CND)) at its AGM yesterday shows the difficulties of being in a relationship-driven business.

According to JP Morgan this is largely the reason for the earnings warning, as the company’s Lloyd Morgan division has lost a significant number of staff in recent months and the relationships lost as a consequence will take some time to rebuild.

This is showing up the division’s earnings as Macquarie notes the division has apparently underperformed significantly in the first four months of this year. As a consequence management has advised earnings for the half year to December will be down slightly on the previous corresponding period, which has seen earnings downgrades as a result.

JP Morgan has cut its half year net profit forecast from $7.7 million to $6.2 million, while bringing down its full year estimate for FY08 by 14% and for FY09 by 7%. In earnings per share terms it is now forecasting 25c and 29.3c respectively, which compares to the 26c earned in FY07.

Macquarie has made similar revisions, dropping its forecasts in FY08 by 16% to 23.9c, in FY09 by 15% to 27.3c and in FY10 by 13% to 29.8c, which compares to the median earnings per share estimates prior to the downgrade according to Thomson One Analytics of 27c and 30c for FY08 and FY09.

While forecasts have been cut both brokers remain positive on the company’s outlook, Macquarie pointing out the latest update shows the other businesses continue to perform solidly and market conditions continue to suggest a good outlook for the medium-term.

JP Morgan has a similar view, suggesting as the downgrade was unexpected and assuming no further issues emerge in the Lloyd Morgan division the company should be able to return to solid earnings growth in coming years.

Following the AGM update both brokers continue to rate the company as Outperform/Overweight, Macquarie noting even on its revised earnings estimates the stock is trading on a P/E (price to earnings ratio) of 9x, which is cheap compared to the market.

There is also potential for some positive news in the medium-term, both brokers noting some recently initiated cost cutting measures should flow through and generate savings of around $800,000 annually.

The FNArena database shows ABN Amro is the other broker to cover the stock, but it has not updated its view following the AGM. The database shows its previous rating as Buy following the profit result in August.

The database has an average price target of $3.44, down from $4.02 prior to the revised guidance, while the pre-AGM median price target according to Thomson One was $4.00. Shares in Candle fell heavily yesterday but have stabilised today and as at 12.35pm were unchanged at $2.55.

Shaw Stockbroking equally kept its Buy rating in place, after cutting earnings forecasts, on the anticipation of a strong second half year performance.

Click to view our Glossary of Financial Terms