Programmed Showing Signs Of Earnings Recovery

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– Programmed result slightly ahead of guidance
– Strong second half gives greater confidence in FY12 earnings recovery
– Brokers broadly positive

By Chris Shaw

Maintenance and project services group Programmed Maintenance Services ((PRG)) delivered full year EBITA (earnings before interest, tax and amortisation) of $48 million, the result coming in slightly above guidance of $46 million. 

The result was ex-restructuring costs and discontinued operation charges and included some asset sales, so operating cash flow in the period was somewhat weak relative to the previous year. Moelis expects a recovery in cash flows in FY12 as current work in progress is completed.

On the plus side, Credit Suisse notes the result showed a far stronger second half compared to the first half, which suggests Programmed has seen the bottom of the earnings cycle.

Credit Suisse now has greater confidence in earnings expectations for Programmed in FY12, which is shaping as an earnings recovery year. JP Morgan agrees, seeing the result as offering evidence restructuring over the past year has lowered Programmed's cost base to a more appropriate level.

By doing so, Programmed is now in a strong position to take advantage of buoyant and improving demand conditions for labour, especially in the resource sector. Programmed's stronger position will also assist in dealing with current market headwinds in JP Morgan's view.

Margin performance also suggests some improvement in earnings can be expected, JP Morgan noting underlying EBITA margin in 2H11 of 4.5% was up from the 2.7% achieved in the first half. Margins remain well below those achieved in FY08/09, which means there is scope for further gains as business conditions improve.

From a divisional perspective the Property and Infrastructure business showed a positive surprise, but Moelis notes conditions remain difficult given many clients are restricting spending at present. Workforce earnings were a little disappointing in Moelis's view, while Resources and Industrial delivered the strong turnaround in half on half earnings.

Looking ahead, analysts see the Property Services division as most challenging given still subdued demand. Deutsche Bank takes the view the uncertainty with respect to earnings for this division will weigh on the share price in the shorter-term.

Changes are also continuing in the Painting business, Citi noting a greater choice provided by Programmed has seen around 50% of the client base move away from the former contract structure. This is allowing Programmed to stem losses from some unfavourable contracts, though shorter-term upside appears limited given client budgets remain under pressure. 

Post the result a number of earnings forecasts have been revised, though changes have been relatively modest. Deutsche Bank has lifted full year forecasts for FY12 by 7%, while Moelis has lifted its estimates by 3%. Moelis is now forecasting earnings per share (EPS) of 22.6c in FY12 and 25.6c in FY13, which compares to consensus estimates according to the FNArena database of 24.3c and 29.1c respectively.

The database shows a consensus price target for Programmed of $2.20, up from around $2.00 previously. Moelis is not in the FNArena database but also has a price target of $2.20 and rates Programmed as a Buy.

Programmed is rated Buy five times and Hold twice. Deutsche Bank is behind one of the Hold ratings, taking the view while the stock offers value at present this value is unlikely to be realised while the Property Services operations continue to face uncertain operating conditions.

Credit Suisse is more positive, arguing while expectations for FY12 cover a wide range Programmed is likely to deliver solid earnings growth in the coming year relative to FY11. The attraction is given a current FY12 earnings multiple of 7.3 times on Credit Suisse's forecasts, the expected earnings recovery doesn't appear priced into the stock.

JP Morgan has turned similarly positive, upgrading Programmed to Overweight from Neutral given the potential for the company's stronger financial footing to both allow for the riding out of current headwinds and to take advantage of any improvement in business conditions.

Shares in Programmed today are slightly higher and as at 11.20am the stock was up 5c at $2.00. Over the past year the stock has traded in a range of $1.03 to $2.95, the current share price implying upside of around 10% to the consensus price target in the database.

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