Australia | Feb 09 2011
By Chris Shaw
Mining, rail and engineering products group Bradken ((BKN)) yesterday reported a below expectations interim profit result of $38.2 million, the number falling about 14% short of the estimate of RBS Australia.
According to RBS much of the shortfall can be attributed to increased operating expenditure, while higher than expected interest costs also played a part. Both the Mining Products and Americast operations performed solidly in the period, while a significant positive in the result was the maintenance of full year earnings guidance.
Credit Suisse suggests the fact full year guidance has been maintained is indicative of an improvement in underlying business conditions. Supporting this argument, in the broker's view, is the potential for margins to increase in the second half of FY11, as well as the likelihood all divisions of the business, apart from rail, record double-digit revenue growth in the second half.
Post the result forecasts across the market have come down, Credit Suisse cutting its earnings estimates by about 3% on average through FY13, while RBS Australia has lowered its estimates by 6-8% across the same period.
Deutsche Bank has been more aggressive in cutting its net profit numbers by 16% in FY11 and by 18% in FY12, though the magnitude of the changes reflects the fact the broker was above guidance with its previous estimates.
In earnings per share (EPS) terms Deutsche Bank is now forecasting 60c in FY11 and 61c in FY12, which compares to Macquarie at 64.3c and 66.3c respectively and UBS at 68c and 75c. Consensus EPS forecasts according to the FNArena database stand at 61.6c this year and 68c next year.
According to UBS, Bradken faces two major headwinds to earnings that are offsetting current strong demand for mining products and consumables out of North America. One is the level of import price competition in the rail division, the second being the upcoming termination of the ESCO licence. The latter will impact on group sales and earnings, but there is some uncertainty in the market at present as to the potential magnitude of this impact.
This uncertainty, plus limited earnings growth expectations for FY12, sees Deutsche Bank retain a Hold rating on Bradken. On the broker's numbers the stock is trading on a FY12 earnings multiple of 14.5 times, which simply implies limited value given the growth outlook in its view.
Credit Suisse agrees, as despite lifting its price target to $9.90 from $9.35 post the result the broker has downgraded to a Neutral rating. UBS also rates Bradken as Neutral, taking the view the current earnings uncertainty is likely to be enough to limit share price outperformance.
But three brokers – RBS Australia, Macquarie and BA Merrill Lynch – continue to rate Bradken as a Buy. For BA-ML there is still value in the stock as its numbers suggest a normalised earnings multiple in FY12 of 12.7 times. BA-ML suggests this makes the stock cheap given the multiple is below the ex-resources average of closer to 15 times.
The attraction for Macquarie is Bradken is well managed and has strong market share in its core products. This is a positive given a number of products service the current mining boom and so are experiencing strong demand.
This exposure to high growth markets such as the mining sector also underpins RBS Australia's Buy rating, while the broker is also positive on the group's offshore growth strategy over the medium-term.
The FNArena database shows a wide range of price targets for Bradken, likely reflecting the current earnings uncertainty surrounding the stock. The consensus price target stands at $9.27, with a range from $8.50 for Deutsche Bank to $9.90 for Credit Suisse.
Shares in Bradken today are weaker and as at 1.35pm the stock was down 22c at $8.60. This compares to a range over the past year of $6.18 to $9.60 and implies upside of around 6.6% to the consensus price target in the FNArena database.
