Small Caps | Apr 06 2011
– Norfolk has guided to solid full year results and stockbroker Moelis anticipates further earnings growth in FY12
– No debt means growth options can be pursued
– Moelis rates Norfolk a Buy
By Chris Shaw
Services provider Norfolk Group ((NFK)) is not due to report full year earnings until late May, but this is close enough for the company to have gone into blackout with respect to talking to securities analysts between now and the result release.
Stockbroker Moelis met with Norfolk management prior to the blackout period coming into effect, in time for management to reiterate earnings growth expectations of around 10% for the period. The other point of note for Moelis is Norfolk will have no debt at the end of the current half-year.
This compares with debt of around $50 million in FY09, highlighting just how successful Norfolk's debt reduction program has been. This is important, Moelis pointing out the strengthened balance sheet gives management the capacity to pursue bolt-on acquisitions and to undertake required working capital expenditure to develop organic growth options.
As Moelis notes, the reduction in debt also increases the chances of a resumption in dividends. This is expected in FY11 with a payment for the year of 2c, rising to 5.5c in FY12.
Operationally, Moelis notes momentum in the O'Donnell Griffen electrical and communications division has remained positive through 2H11. This highlights the success of an approach where the focus has been on a number of resilient or growth sectors such as resources, rail, power and water.
The Haden division, which covers air conditioning installation and maintenance, recorded a loss in the first half of FY11 of $1.6 million. Management indicated to Moelis there has been improved performance to date in the second half, with full year likely to be around a break-even result.
Further improvements are possible, Moelis noting management has done a good job in driving cost reductions in the division. As well, attention is to be re-focused on markets with better opportunities such as in South and Western Australia.
With earnings growth of around 10% expected this year, Moelis is forecasting growth of a further 5-10% in FY12. While growth in the O'Donnell Griffen division will likely slow due to some expected contracts being brought forward into FY11, Moelis expects improvements in the Haden division to offset this impact.
Earnings per share forecasts reflect this, Moelis's numbers currently standing at 12.4c this year and 14.3c in FY12. Consensus forecasts for Norfolk according to the FNArena database stand at 13.2c in FY11 and 17c in FY12, suggesting Moelis is positioned at the conservative end of the market.
Norfolk shares have risen by around 80% over the past year, but this doesn't deter Moelis. The stockbroker retains a Buy rating, continuing to see value given Norfolk is trading on a FY12 earnings multiple of around 10 times at current levels.
Moelis has a price target on Norfolk of $1.60, which is well above the consensus price target according to FNArena's database of $1.31. The database shows two Buy ratings for Norfolk, these courtesy of RBS Australia and JP Morgan. Neither broker has updated on the stock since interim results in November.
Shares in Norfolk today are little changed and as at 11.00am the stock was 0.5c lower at $1.395. This compares to a trading range over the past 12 months of $0.685 to $1.42. The current share price implies about 7% downside to FNArena's consensus price target.
