Australia | Aug 27 2009
By Chris Shaw
Leading into the Goodman Fielder ((GFF) profit result Deutsche Bank was positive on the earnings outlook for the company (see Deutsche Says Goodman Fielder At The Start Of An Earnings Upgrade Cycle, FNArena, 24/8/09) so post the result it is time to check on what the broker and the rest of the market think about the stock.
Full year earnings of $187 million were about 5% better than Deutsche Bank had forecast, in its view driven largely by a strong result from the company’s dairy operations in the June half and evidence the decline in input costs it had expected are starting to flow through.
The broker expects this lower input cost trend will continue to the extent it is forecasting net profit in FY10 of $210 million, which it notes is presently some 7% above market consensus. What supports its positive view is the fact in FY09 the company was able to reduce its net debt position thanks to strong cash flows, which Deutsche sees as reducing the risk of an equity raising to repair the group’s balance sheet.
Post the result, Deutsche’s earnings per share (EPS) forecasts for the company stand at 15c for both FY10 and FY11, which is well above JP Morgan’s estimates of 13.4c and 13.3c respectively. According to JP Morgan, result quality was an issue as while headline numbers were better than expected, this was partly the result of asset sales and some accounting policy changes.
To reflect this the broker made slight cuts to its earnings forecasts and post the result it suggests the stock is around fair value at current levels, especially in relation to sector peers. This means no change to the broker’s Neutral rating, one matched by Bank of America Merrill Lynch.
According to the latter, the result showed some positive signs as the combination of solid cash flows and lower input prices means the company is in a far stronger position than was the case 3-6 months ago. This is especially the case given performance in the second half of the year was much better than in the preceding six months. However, BA-ML also believes all this is largely priced into the stock.
Bank of America Merrill Lynch does concede there is upside potential if the recent improvement in performance continues, a view more in line with that of Credit Suisse who, post the result, suggests the strong cash generation being achieved means it is now less likely the company will need to raise equity going forward.
The broker takes the view the stock became undervalued when margins came under pressure in recent years and with evidence margins are improving and with further cost savings to be achieved, it expects the stock’s valuation to also improve accordingly.
Credit Suisse’s earnings per share forecasts stand at 14.2c in FY10 and 15.8c in FY11 compared to consensus EPS forecasts according to the FNArena database of 14.5c and 15.5c respectively. In Credit Suisse’s view, this is enough to justify an Outperform rating, one shared by Citi who also pointed to an expected improvement in margins and cash flows as reasons to remain positive on the stock.
Overall the FNArena database shows a total of four Buys, five Holds and one Sell rating, with an average price target of $1.58, up from $1.49 prior to the result. Shares in Goodman Fielder today are slightly stronger and as at 12.15pm the stock was up 2.5c at $1.49. Over the past year it has traded in a range of $0.93 to $1.695.
