Australia | Dec 01 2011
– JP Morgan initiates on Bradken with an Overweight rating
– Attracted to leverage to growth in mining production
– FNArena database now shows seven Buy ratings
By Chris Shaw
For some time Bradken ((BKN)) has been among the market's preferred exposures to mining sector infrastructure spending, as evidenced by a perfect six-for-six Buy ratings among brokers in the FNArena database providing coverage of the stock.
This has now become seven positive views, with JP Morgan initiating coverage on Bradken with an Overweight rating and price target of $9.41. The primary attraction for the broker is leverage to growth in mining production in the bulk, base and precious metals sectors.
This reflects Bradken's role as a supplier of consumable products needed in the sector such as ground engaging tools, wear plates, crawler shoes, wagons and bogies. These are sourced from the company's global footprint of foundries, machine shops, fabrication facilities, engineering workshops and other facilities.
Bradken's product offering is divided into five divisions, including Mining Products, Engineered Products, Rail, Industrial and Other, the latter including Cast Metal services and Power and Cement operations in the UK.
For JP Morgan the key remains Bradken's leverage to the mining sector, where growth is being driven by continued industrialisation in the developed world. This process is supporting strong demand growth for bulk and base metals, driving prices higher and so generating a supply response. As production increases, so too does demand for products manufactured by Bradken.
This supports the strong near-term earnings growth expectations of JP Morgan. In earnings per share (EPS) terms the broker expects Bradken will grow earnings by 19% this year and 18% in FY13, supported by strong underlying demand, higher production volumes and continued investment in organic and acquisitive growth.
In EPS terms JP Morgan expects Bradken to earn 71.9c this year and 85.1c in FY13. This compares to consensus EPS forecasts according to the FNArena database of 71.5c and 82.7c respectively.
Despite the strong earnings growth expectations, JP Morgan notes Bradken trades at a 21% discount to valuation at present and so offers an opportunity. This reflects potential catalysts to closing this valuation gap, such as delivery of management's guidance for earnings growth in FY12.
As well, JP Morgan suggests the successful integration of recent acquisitions such as Norcast and AOA should act as positive share price drivers as the market gains greater confidence in earnings expectations for Bradken.
Addressing a decline in group returns stemming from strong competition putting pressure on margins and prices should also be viewed positively by the market in JP Morgan's view. Medium-term Bradken is expected to recoup some of the recent declines, but a return to historical peak rates of return looks increasingly challenging.
Among the other positive views in the market, Macquarie suggests what should help Bradken deliver solid earnings performance over the medium-term is strong management and good market share in core products.
The other supportive factor noted by BA Merrill Lynch post Bradken's AGM in October is even using bearish assumptions in its model, the resulting base case valuation implies the stock is not so far from a potential bottom.
BA-ML's price target for Bradken stands at $9.30, which is almost exactly equal to the consensus price target according to the FNArena database of $9.32. Targets range from Credit Suisse and Deutsche Bank at $8.70 to UBS at $10.15.
Shares in Bradken today are stronger and as at 10.30am the stock was up 13c at $7.46. This compares to a trading range over the past 12 months of $6.09 to $9.60. The current share price implies upside of around 7% to the consensus price target in the FNArena database.
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