Australia | Aug 25 2009
By Chris Shaw
AWB ((AWB)) has updated the market on the costs associated with its decision to close down its operations in Brazil and the news was not as good as hoped, with the division now expected to generate an operating loss of $50-$60 million for the year and incur wind down provisions of $80-$95 million.
This was worse than the market had been anticipating and causes some adjustments for forecasts, largely because the closure of the Brazilian operations had been expected to see a release of capital the group could use to pay down some of its outstanding debt.
As JP Morgan points out, only around $30 million of capital is now likely to be released, which equates to an $84 million smaller reduction in corporate net debt than the broker had been forecasting. This means the group’s balance sheet is again an issue as net debt to earnings before interest, tax, depreciation and amortisation in FY11 is around 4.1x, meaning as much as $175 million in equity is needed by that year to bring this ratio down to a more appropriate level.
Around $50-$60 million of this could come from the sale of the company’s stake in Hi-Fert, but there would still be a shortfall of as much as $125 million on the broker’s numbers. While the issues in Brazil and recent share price strength have seen JP Morgan downgrade the stock to Underweight from Overweight, the reaction from RBS Australia has been less severe, downgrading only to Hold from Buy.
The broker cites similar reasons to JP Morgan for its move, but RBS also points out FY09 is likely to prove to be bottom of the cycle earnings for the company, meaning it expects a rebound in FY10 assuming more normal conditions in the group’s Rural Services division.
RBS Australia is forecasting normalised earnings per share of 14.8c this year, rising to 16.3c in FY10 and 17.5c in FY11, while JP Morgan’s estimates for FY10 and FY11 are at 16.8c and 17.5c. Macquarie is forecasting 17c in both years, while the FNArena database shows a consensus forecast for FY10 of 18.5c.
Post the update from management, Credit Suisse retains its Outperform rating on the stock, pointing out while the decision to exit Brazil will end up costing more than had been expected, it will allow for better allocation of capital across the group and this will reduce the volatility of earnings.
As well the broker notes while the group still needs to recapitalise, there is potential for its capital position to improve enough to justify further share price upside beyond what has been achieved of late (AWB shares traded down to around the $1.00 mark in late May/early June).
UBS is among those that don’t agree with the Credit Suisse view, arguing instead there needs be improved clarity with respect to the company’s debt position and funding for requirements such as Landmark Finance. Until this is achieved UBS is not prepared to turn more positive on the stock.
UBS rates the stock as a Hold, while the FNArena database shows a total of two Buys, five Holds and one Sell or Underweight rating. The average share price target on the stock is $1.61, little changed from $1.60 prior to the update.
Shares in AWB today are weaker and as at 1.15pm the stock was off 8c or 5.5% at $1.38. Over the past year it has traded in a range of $0.70 to $3.54.
