Australia | Sep 07 2009
By Chris Shaw
Given a change in its financial year to a January year-end, the interim result from office supply group Corporate Express ((CXP)) was always going to be messy. According to Credit Suisse it was just that, though the broker takes the view the result showed the strength of the company’s business model as while revenues were under pressure cost cuts meant margins held reasonably well.
But UBS had higher expectations for margins and so it takes the view the result fell short, which has implications for its estimates going forward. Factoring in lower margins for the business and some cuts to revenue expectations sees the broker lower its forecasts in coming years by 12-7%, such that it now expects earnings per share (EPS) of 32c this year and 37c for the year ending January 2011.
This puts it a little below Credit Suisse for the next two years given its respective forecasts of 34.2c and 38c, while RBS Australia is at 32.9c and 33.5c respectively. Consensus forecasts according to the FNArena database stand at 34.1c and 36c respectively for FY10 and FY11.
Post the result Credit Suisse points out the company generates strong cash flows and has a solid balance sheet, but the broker argues without acquisitions it sees little way the company can generate strong organic earnings growth given it is a relatively defensive play in a low growth industry. As a result the broker retains its Neutral rating, though it has lifted its price target to $4.25 from $3.75.
UBS downgraded to a similar Neutral rating from Buy previously, arguing that at 12.2 times one-year forward earnings estimates the stock is not particularly cheap for the expected earnings growth it will generate, meaning outperformance is unlikely in the broker’s view.
Macquarie agrees as on its numbers the company is likely to make around $87.6 million in earnings before interest and tax in FY10, which is a little below the current consensus range of $90.9-$100.5 million. The reason the broker is cautious is while the Australian economy appears to have made it through the worst of the downturn and business confidence is improving, this has not yet flowed through into higher corporate spending.
In the broker’s view the current earnings multiple is not demanding but neither is it cheap, especially as earnings growth in the shorter-term is likely to be driven by cost cutting initiatives given the earnings story is really a late-cycle play. Market share gains in the mid and small office segments will help but not enough to drive share price outperformance in the broker’s view. JP Morgan agrees, suggesting the current share price multiple is fair for a company struggling to deliver top line earnings growth.
RBS Australia matched UBS in downgrading the stock to Hold from Buy, noting recent share price strength has removed some of the value previously on offer. Given the changes the FNArena database now shows the company as rated Hold five times and Accumulate once.
The average share price target for Corporate Express is now $3.74, down from $3.76 prior to the result. Shares in the company today are slightly weaker and as at 10.30am the stock was 1c lower at $3.89, which compares to a trading range over the past year of $2.60 to $5.67.
