Australia | Oct 02 2009
By Chris Shaw
Analytical laboratory services group Campbell Brothers ((CPB)) has joined the long list of companies looking to raise funds from the market by announcing a 1-for-6 rights issue at $22.00 per share, which is a substantial discount to the better than $30.00 per share at which the stock was trading before the announcement.
What sets the company apart from a lot of the other issues of recent months is the $196 million being raised will go towards acquisitions rather than simply addressing debt concerns, which in the view of Bank of America Merrill Lynch means there is the potential for the company to grow earnings further as this capital is allocated.
UBS agrees, pointing out the company has a good track record in growing its business via acquisitions as evidenced by the growth achieved in the laboratory services division in recent years, where revenues in its environmental and coal businesses grew from $125 million in 2004 to more than $600 million in 2009.
The potential first step in this growth was also announced yesterday as the company unveiled a takeover offer for PearlStreet ((PST)), which is Australia’s largest Non-Destructive Testing services provider, at 56c per share, valuing the company at $86 million.
While the offer has been rejected by PearlStreet management, Merrill Lynch suggests it would offer some upside as it sees scope for Campbell Brothers to generate a better earnings margin than is currently being returned, while the price being offered appears attractive if it can find success in the deal.
What the acquisition would also do, according to UBS, is add to the company’s existing skill set and technical capacilities, something it is likely to want to do as it tries to expand its range of services. In the broker’s view it has two choices for growth, these being expanding further in its existing markets of minerals, coal and environmental testing or looking to build its presence in new markets such as food, oil and gas and inspection services
On news of the issue and the takeover offer, UBS has not adjusted its earnings per share (EPS) forecasts as while it estimates the rights issue will dilute EPS by as much a 11.6% this should be offset by the money being applied where it can earn a higher return on capital employed (ROCE). Assuming a ROCE rate of 20-30% the broker estimates there is scope for 7-18% accretion to EPS in 2011.
UBS’s current EPS forecasts stand at 160c in FY10 and 192c in FY11, while Merrill Lynch’s estimates are 159c and 179c respectively. The consensus FY10 forecast according to the FNArena database stands at 154.7c.
Risk appears to be to the upside as Merrill Lynch notes management has indicated further acquisitions that are already at advanced stages could add as much as $30 million to earnings in FY11, while as UBS points out the trading environment in the company’s markets generally is improving as the global economic recovery continues and this also suggests earnings momentum should be positive.
Given the potential upside, Merrill Lynch suggests its current valuation on the stock of $28.93 per share is conservative as it doesn’t factor in any value accretion from acquisitions, so it has set its price target at a premium to this at $32.00.
UBS has a price target of $34.00, up from $30.00 previously, while the average price target according to the FNArena database is $29.71, up from $29.11 prior to the announcement of the issue and takeover offer for PearlStreet. The database shows three Buys, one Accumulate below $27.50 and two Hold ratings, though only UBS and Merrill Lynch have updated their views post the company’s latest announcements.
Shares in Campbell Brothers are weaker in early trading and as at 10.55am the stock was down $1.20 or 3.9% at $29.95. This compares to a trading range over the past year of $8.64 to $33.50.
