Australia | May 22 2012
– Campbell Brothers beats consensus with FY12 result
– Strong minerals testing drove earnings
– Further growth expected in coming years
– Some brokers cautious given uncertain economic conditions
– Lack of visibility in exploration spending also a source of concern
By Chris Shaw
With minerals testing operations the primary drive of earnings, Campbell Brothers ((CPB)) yesterday delivered a better than expected full year profit result. Net profit after tax of $222.4 million was better than market consensus of around $218 million, while final dividend of 130c was also better than the market had forecast.
The minerals testing division, which accounts for around 63% of earnings, delivered a 92% increase in earnings before interest and tax (EBIT) on margins that improved by 290 basis points to 36.3%. As UBS notes, organic growth from the division was around 55%.
BA Merrill Lynch points out the result showed Campbell Brothers continues to drive operating leverage through its existing businesses, while the company adds to growth by entering attractive new markets through merger and acquisition activity.
The strong growth achieved in the minerals testing division is likely to continue in Deutsche Bank's view, as management has indicated minerals activity remains strong and there are no signs of any slowdown emerging.
Management intends to continue to expand global lab capacity, Deutsche Bank noting 14 new or refurbished minerals labs are planned at present. There are also plans to continue to diversify the earnings base of Campbell Brothers through further moves into analytical testing in the food and pharma sectors.
The diversification plan makes sense in the view of Deutsche, as the broker cautions while there are no current signs of a slowdown in the minerals testing market, early stage exploration typically has low visibility and is the first to be cut back when conditions worsen.
BA-ML is also somewhat cautious on the outlook for Campbell Brothers, seeing two key questions for the group. The first is the extent to which the market is factoring in continued strength in minerals, while the second is the ability of the balance sheet to continually fund acquisitions. RBS doesn't see any issues in this regard, noting gearing for Campbell Brothers at present stands at around 28%.
A through-the-cycle valuation that allows for $100 million per year in acquisitions at an earnings multiple of seven times, as well as a significant downturn in minerals post FY14 and lower margins, is $53.12 in BA-ML's view.
This leads BA-ML to maintain a Neutral rating on Campbell Brothers on valuation grounds, this despite a still positive outlook for minerals activity in FY13. Earnings forecasts reflect this positive view of the year ahead, BA-ML expecting earnings per share (EPS) in FY13 of 443c, rising to 476c in FY14. This compares to a FY12 EPS result of 333c.
BA-ML's EPS forecasts compares to consensus EPS estimates for Campbell Brothers according to the FNArena database of 396.8c for FY13 and 433c for FY14. UBS is forecasting EPS of 391c and 415c respectively and based on these forecasts estimates Campbell Brothers trades on 17% and 14% discounts to global peer averages for FY13 and FY14.
A modest discount is appropriate in the view of UBS given Campbell Brothers has a far smaller market cap than its largest peers and the ALS minerals division has a smaller global revenue share than its major competitors.
This sees UBS retain a Neutral rating with a price target of $64.50, which is solidly above BA-ML's target of $59.00. The FNArena database shows a consensus target for Campbell Brothers of $62.77, with a range from $55.54 for JP Morgan to $69.76 for RBS Australia.
As with the spread in price targets there is a spread in ratings, as aside from five Hold recommendations the database shows one Buy rating and one Sell on Campbell Brothers, with Macquarie having downgraded to Neutral from Outperform. RBS argues the stock remains a Buy given a strong track record in delivering earnings growth both organically and via acquisitions.
But JP Morgan counters with an Underweight recommendation, taking the view the uncertainty over minerals exploration activity in FY13 means earnings visibility for Campbell Brothers in the coming year is low. This should limit share price upside in the broker's view. JP Morgan rates stocks within the sector, not within the index.
Campbell Brothers today are stronger in line with a higher overall market. As at 10.45am the stock was up $1.76 or around 3% to $58.46, which compares to a range over the past year of $38.24 to $69.92. The current share price implies upside of more than 10% relative to the consensus price target in the FNArena database.
Having been a darling of the post-GFC market, and a standout-out in the outperforming mining services sector, CPB has been hit hard over the past month by a combination of an easing of mining company capex intentions and the return of euro-fear, not to mention a rush to lock in profits on a winning trade. Fresh analyst forecasts imply an FY13 dividend yield of 4.9%. With consensus forecast earnings indicating growth expectations, CPB at $58ps provides investors with a less unpalatable decision than CPB at $70ps.
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