Fleetwood Floors BHP

This story features FLEETWOOD LIMITED, and other companies. For more info SHARE ANALYSIS: FWD

– Fleetwood wins new contract with BHP Billiton
– Deal should deliver solid boost to revenues
– Additional contract wins offer upside earnings risk
– Yield also attractive, supports value in the stock

By Chris Shaw

Fleetwood ((FWD)) this week announced the signing of a five-year contract with BHP Billiton ((BHP)) for the manufacture of up to 240 ancillary building floors per year. The floors will include ablutions facilities, security offices, crib rooms and administration units. 

The deal is a clear positive for Fleetwood, as while Credit Suisse suggests there is broad variability in the potential value of the contract it is likely to be more than the $25 million value of a similar contract with Rio Tinto ((RIO)) in FY09.

RBS Australia agrees, estimating the contract could add between $30-$60 million to annual revenues for Fleetwood. This has seen RBS push up its earnings per share (EPS) estimates, numbers for FY12 being increased by 8% and for FY13 by 10%. 

Credit Suisse has similarly lifted forecasts but by a lesser amount, increasing its estimates by 1-2% through FY13. DJ Carmichael has split the difference and increased EPS forecasts by 3.2% and 4.2% respectively for FY12 and FY13.

This leaves DJ Carmichael forecasting EPS for Fleetwood of 90.2c this year and 103.9c in FY13. This compares to consensus EPS forecasts according to the FNArena database of 93.2c for FY12 and 98.9c for FY13 (note not all brokers have updated their model post the announcement).

Given EPS for FY11 was about 89c, earnings growth for Fleetwood for FY12 appears relatively modest. But in Credit Suisse's view risk to forecasts are to the upside at present, this thanks to a strong pipeline of contract opportunities. 

As management indicated when releasing FY11 results last month, the contract tender environment for portable accommodation remains robust. As well, DJ Carmichael suggests any increase in utilisation at the Searipple accommodation village would also offer some upside risk for earnings.

Management has guided to a solid 1H12 result from Searipple and RBS notes occupancy levels are at present tracking in line with this guidance. While a softening is expected in the second half of FY12, there should be a pick up in FY13 as a number of major projects start to come on-line.

On the recreational vehicle side of the business, RBS has been in touch with management and the indication is so far in FY12 production volumes have not increased at the rate expected by the market. RBS had modeled conservative numbers in expectation of such an outcome and so remains comfortable with its forecasts, which stand at the upper end of market estimates.

Changes to earnings estimates have seen some increases in price targets, RBS lifting its target to $13.56 from $13.16 and Credit Suisse by 14c to $11.54. The consensus price target in the database now stands at $12.60, up from $12.52. DJ Carmichael is not in the database but has lifted its target by 20c to $11.70.

Ratings are unchanged, with the database showing Fleetwood is rated as Buy three times and Hold twice. DJ Carmichael rates Fleetwood as Accumulate (one notch below Buy).

What makes Fleetwood more attractive in the face of somewhat subdued earnings growth expectations in FY12 is an attractive dividend yield. DJ Carmichael's forecasts imply a fully franked yield of 7.1% for FY12 and better than 8% for FY13, while RBS's estimates suggest respective yields of 7.85% and 8.49%. 

The yield looks supportable in the view of Credit Suisse given Fleetwood has no debt and enjoys solid cash conversion from its operations. As well as the attractive yield, Fleetwood appears to offer value longer-term given forecast earnings multiples according to RBS of 10.9 times in FY12 and 10 times in FY13. 

 
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