Australia | Apr 27 2011
– Hastie Group released belated interim result last week
– Updated earnings guidance means significant cuts to broker forecasts
– Balance sheet issues leave question marks over survival
– RBS Australia downgrades to a Sell
By Chris Shaw
Having been suspended from trading for eight weeks, building solutions and maintenance services company Hastie Group ((HST)) was reinstated last week following the belated release of interim earnings results. The result was a weak one and saw management cut full year EBIT (earnings before interest and tax) guidance by 32% to $50 million.
According to RBS Australia, the cut in guidance for the full year reflects issues from a previous plumbing acquisition and lower gross margins. As the first is a new glitch in internal control systems and the latter a shift from previous pricing discipline, RBS sees both as a concern going forward.
A further issue with the revised EBIT guidance is RBS doesn't expect it will be achieved. The new guidance implies a roughly 45:55 split for earnings for the year, which is seen as a challenge. To reflect this, RBS has cut EPS (earnings per share) forecasts by 58% in FY11 and by 65% in FY12 to 6.9c and 7.4c respectively. For FY11 this is slightly below the revised guidance from management.
JP Morgan has similarly cut EPS estimates for Hastie, its EPS forecasts now standing at minus 36c and 10.2c respectively for FY11 and FY12. The negative result for FY11 reflects material write-downs announced with the interim result. Consensus EPS forecasts for Hastie according to the FNArena database stand at 0.8c and 9.4c respectively for FY11 and FY12.
Along with changes to earnings estimates there have been price target reductions, RBS Australia slashing its target to $0.20 from $1.45 and JP Morgan to $0.24 from $1.01 previously. The consensus price target according to FNArena stands at $0.53, but this is likely to come down as other brokers covering Hastie update models to reflect last week's interim result.
With respect to the future, both JP Morgan and RBS Australia see a weak balance sheet as Hastie's major issue. On JP Morgan's numbers, ND:ND+Equity (net debt to net debt plus equity) stands at 47%, which sees Hastie in breach of debt covenants relating to interest and debt coverage ratios.
While there are a number of ways out of the problem, such as trading out of the difficulties using cash flows to reduce debt, selling assets, raising equity, finding a strategic investor or takeover partner and undertaking a debt-for-equity swap, JP Morgan sees a muddling through approach as most likely.
This will require continued support from Hastie's bankers. JP Morgan estimates the market is ascribing a less than 50% chance of corporate survival given the current depressed share price. RBS Australia notes recapitalisation attempts have been unsuccessful over the past few months, so balance sheet pressures are unlikely to disappear anytime soon.
These pressures override any valuation analysis in RBS's view, so with current risks very high the broker has downgraded to a Sell rating, from Hold previously. JP Morgan was already at Underweight, as the balance sheet issues suggested there was little chance for share price outperformance in the absence of news related to asset sales, an equity raising or a significant shift in corporate direction.
What also supports JP Morgan's Underweight rating is with the share price of Hastie driving down market capitalisation for the group, the stock is likely to be dropped from major market indices. This could force selling from Index-oriented institutional investors.
Shares in Hastie today are weaker and as at 11.20am the stock was down 2c at $0.22. Over the past year Hastie has traded in a range of $0.22 to $1.73.
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