Australia | Aug 07 2009
By Chris Shaw
Given the tough operating conditions the company experienced over the past year the normalised FY09 profit of $73.8 million reported yesterday by resources and rail services group Bradken ((BKN)) was a solid result according to brokers covering the stock.
The earnings figure fell a little short of UBS’s forecast of a profit of $76.7 million but was slightly higher than the estimates of Credit Suisse’s and RBS Australia, the latter suggesting it was good cost control that was behind the result. It is this ability to control costs that sees the broker expecting further earnings growth going forward despite the difficult trading conditions being experienced.
This view is supported by management comments that trading conditions have stabilised across most divisions, which should allow for margins to be sustained across the business. As well, management indicated the outlook for the rail division is for a strong FY10 at both the revenue and margin lines, which would be an improvement from the margin pressures recorded in FY09.
The other supportive factor for the stock according to UBS is results have been nowhere near as bad as were being priced into the stock after its FY09 interim result, as while earnings have fallen from FY08 levels the decline has not been as severe as expected. Add in the cost reductions and performance has been quite reasonable under the conditions in the broker’s view.
Post the full year result UBS has lifted its earnings per share (EPS) estimates in coming years, increasing its FY10 number to 58c from 56c previously and its FY11 forecast to 71c from 70c. This compares to normalised EPS of 52c for FY09.
RBS Australia has also lifted its forecasts by 24-59% through to FY12 but in contrast to UBS sees FY10 earnings falling below FY09 numbers, its EPS estimates now at 49.2c this year and 55.2c in FY11. Credit Suisse is closer to RBS Australia with its numbers, forecasting EPS of 49.6c and 58.4c respectively after 7% increases to its numbers through to FY12. Consensus EPS forecasts according to the FNArena database now stand at 54.4c and 62.4c respectively.
The changes to earnings forecasts see the average price target according to the FNArena database increase to $6.50 from $4.21, driven in part by RBS Australia lifting its target to $6.50 from what had been a well out of the market target of $2.05.
In Credit Suisse’s view the company is now well placed to benefit from any recovery in volumes, which it sees as likely to be led by the mining sector. On valuation grounds however the broker retains its Neutral rating as on its revised numbers the stock is trading on 12 times FY10 earnings, which is broadly in line with the average for small cap industrials.
RBS also has a Hold rating on the stock, reflecting both recent share price gains and the fact while operating conditions appear to be stabilising it has only been a short-term trend, so it would prefer to see the more stable conditions continue for longer before it turned more positive.
UBS retains its Buy rating as it sees scope for solid medium-term earnings growth, especially as demand for the group’s products improves. Assuming this occurs as it expects the broker sees enough value at current levels to justify a positive recommendation.
Overall the FNArena database shows the stock is rated as Buy twice and Hold four times, with GSJB Were upgrading to a Buy post the result as its earnings upgrades have increased its valuation to a little over $8.00 and its price target to $8.99.
Shares in Bradken today are stronger despite a weak overall market and as at 11.10am the stock was up 25c at $6.25. This compares to a trading range over the past year of $0.945 to $11.39.
