Australia | Aug 29 2011
– Alesco lower 1H12 guidance only a month into the year
– Brokers cut forecasts, ratings downgraded
– Citi sees implications for other companies in similar markets
– Downgrades both GUD Holdings and GWA Group as well
By Chris Shaw
It was only a month ago Alesco Corporation ((ALS)) reported full year earnings for FY11 but trading conditions since the profit result have been bad enough to force management to quickly lower earnings guidance for FY12.
Revenue for the first half of FY12 is now expected to be 6% lower than for the corresponding period in FY11, while management's guidance suggests net profit for the half will be between 26-39% lower than for the same half last year. This implies a profit for the period of $6.2-$7.5 million.
JP Morgan notes the main reason for the downgrade to earnings guidance is a significant deterioration in the renovations market in Victoria in particular. This is impacting on earnings in the Functional and Decorative Products division in general and specifically for the Parbury kitchen laminates operations.
According to RBS Australia, the update also means the challenge in reclaiming lost market share in the Parbury division is proving more difficult than had been expected. While Alesco intends to counter the weak conditions with more cost cutting and labour reductions, RBS expects these won't be nearly enough to prevent the fall in earnings implied by the new guidance.
Brokers have been quick to make significant changes to earnings estimates, with RBS cutting its earnings per share (EPS) forecasts by 35% through FY13 and Citi and JP Morgan dropping its numbers by similar percentages.
Consensus EPS forecasts for Alesco now stand at 24.7c for FY12 and 31.6c for FY13. The impact of revisions to forecasts has been felt in price targets, the consensus target according to the database falling to $2.18 from $3.35 previously.
As conditions in some of Alesco's markets have fallen to a level where management can't offset the impact through efficiency improvements, the chances of share price outperformance prior to any improvement in market conditions has been greatly reduced according to JP Morgan.
As a result JP Morgan has downgraded to a Neutral rating from Overweight previously, a move matched by both Citi and RBS Australia. This leaves Alesco rated as Buy once and Hold four times by brokers covering the stock in the FNArena database.
Goldman Sachs is not in the database but has similarly downgraded to a Hold rating from Buy previously, while dropping its target by 46% to $2.01.
The downgrade to earnings guidance by management at Alesco has implications elsewhere, as other stocks exposed to the building products and consumer related sectors such as GUD Holdings ((GUD)) and GWA Group ((GWA)) are also likely to find the going tough.
To factor this in Citi has lowered earnings forecasts and downgraded ratings for both companies to Hold from Buy. Price targets have also been cut, by 22% to $7.68 in the case of GUD and by 12% to $2.45 for GWA.
Citi has been the first to push through changes to numbers for GWA and GUD, but following the Alesco update there is scope for other brokers to soon follow suit. Currently GUD is rated as Buy four times and Hold twice, while GWA Group scores three Buy ratings and three Hold recommendations.
Shares in Alesco today are weaker and as at 1.00pm the stock was down 7c at $1.715, which compares to a range over the past year of $1.705 to $3.63. Compared to Friday, shares in both GUD and GWA were little changed at the same time.
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