Australia | Jun 01 2011
– Bradken surprises with capital raising
– Funds to be used for increased capex and possibly acquisitions
– Broker earnings forecasts and price targets trimmed
– Two ratings downgrades on the back of the raising
By Chris Shaw
Bradken ((BKN)) yesterday unveiled a $162 million capital raising and the opening of a share purchase plan, with the proceeds to be used to fund planned growth capex and increase flexibility for potential acquisition opportunities.
As Deutsche Bank notes, capex plans have increased and now stand at $150-$160 million for FY12, which compares to the broker's previous estimate of $85 million. Credit Suisse sees growth capex as significantly accretive for earnings longer-term, taking the view Bradken can achieve a three year cash payback on this capex spend.
On the flip side, Credit Suisse suggests in the absence of any acquisitions the capital raising was not necessary, as debt levels were well below covenant levels and management's targets. Post the raising Bradken is expected to have around $250 million in balance sheet headroom to remain within gearing target levels.
On the back of the capital raising, earnings forecasts for Bradken have been adjusted, most brokers trimming estimates from FY12 and beyond. Consensus earnings per share (EPS) estimates for Bradken according to the FNArena database now stand at 61.2c in FY11 and 65.4c in FY12.
Brokers have also adjusted price targets, the consensus target according to the database now standing at $9.31. This is down from $9.64 prior to the announcement of the capital raising. There is a reasonable spread in price targets, ranging from $8.60 for Deutsche Bank to $10.00 for UBS.
Both Credit Suisse and Deutsche Bank have downgraded Bradken to Hold ratings from Buy previously on news of the capital raising. With Bradken's share price gaining around 13% in May, Deutsche Bank takes the view while acquisitions offer potential upside, the risk/reward profile at current levels doesn't favour a Buy rating.
This is particularly the case given increased execution risk from the higher planned capex. Credit Suisse's downgrade is a valuation call, as factoring in the capital raising sees a cut in valuation and price target to $9.35 from $9.90 previously.
RBS Australia retains a Buy recommendation, pointing out management at Bradken does have a solid track record in both sourcing and integrating acquisitions. BA Merrill Lynch is also positive and retains a Buy rating, noting the capital raising adds to financial flexibility and reduces financial risk ahead of the increased capex program.
The FNArena database shows Bradken is rated as Buy four times and Hold twice.
Shares in Bradken today are weaker as the market digests the equity raising and as at 10.45am the stock was down 39c or 4.5% at $8.26. Over the past year Bradken has traded in a range of $6.71 to $9.60.
The current share price implies upside of around 8% to the consensus price target in the FNArena database.
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