Australia | Nov 02 2011
– Transpacific refinancing removes a headwind
– Company should benefit from improved management focus
– Goldman Sachs upgrades to a Buy rating
By Chris Shaw
Transpacific Industries ((TPI)) has undergone significant changes since 2009, with a new chairman and senior management team and new governance functions in place. The final step needed was a debt restructuring and capital raising, which is now underway.
A debt refinancing for $1.5 billion has been achieved on improved terms and a total of $300 million is to be raised from institutional and general shareholders.
For Goldman Sachs, the news of the recapitalisation has been enough to justify upgrading to a Buy rating from Hold previously. The move to raise funds should see Transpacific's balance sheet return to a more normal gearing level over the next three years, which implies a move to interest cover of more than three times. This should make the stock more attractive to a wider range of investors.
As well, the restructuring means no debt matures between now and November 2014, something Goldman Sachs suggests will allow management to run the business with a view to what is in the longer-term best interests of the group without the distraction of debt issues.
In terms of Transpacific's operations, market growth about equal to that of GDP growth is a reasonable expectation in the view of Goldman Sachs. This should translate into solid growth for Transpacific given strong market positions, the company enjoying about a 20% share of key operating markets in the industrial cleaning, recycling and waste management sectors.
Under such an assumption the stock appears to offer value at current levels, as Goldman Sachs estimates Transpacific is trading on an earnings multiple of around 9.8 times in FY13 and 8.4 times in FY14.
This is based on Goldman Sachs's earnings per share (EPS) forecasts of 5.2c for FY12, 7.6c for FY13 and 8.9c for FY14. These estimates compare to consensus EPS forecasts according to the FNArena database of 6.4c for FY12 and 8.1c for FY13.
Assuming the Transpacific balance sheet returns to more normal levels, Goldman Sachs sees scope for the current discount to the Small Industrials index of 1% for FY13 and 7% for FY14 to be unwound. This should also see the current 20% earnings multiple discount relative to global peers come in from what are seen as excessive levels at present.
Goldman Sachs has not been the only broker to turn more positive on Transpacific on the back of the debt restructuring. Both Credit Suisse and RBS Australia have similarly upgraded to Buy ratings from previous Hold recommendations.
RBS agrees with the Goldman Sachs view the debt restructuring and capital raising could act as a possible catalyst for the share price of Transpacific, as it removes what had been some headwinds for the company.
Credit Suisse sides more with the other element of the Goldman Sachs argument, in that with debt and balance sheet pressures no longer on the minds of management, Transpacific can focus on growing its operations. This offers some upside medium-term.
The changes to the ratings of RBS and Credit Suisse means Transpacific is now rated as Buy three times and Hold twice, while Macquarie is restricted from offering a rating. Goldman Sachs is not in the FNArena database.
With the capital raising increasing the number of shares on offer, the consensus price target for Transpacific now stands at $0.87, down from $0.90 prior to the refinancing announcement.
Shares in Transpacific have traded inside a range over the past year of $0.515 to $1.50. The current share price implies upside of around 23% to the consensus price target in the FNArena database.
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