Small Caps | May 31 2012
– Programmed full year result beats expectations
– Further modest growth expected in FY13
– Brokers see value at current levels
– Upgrade by Citi means all brokers rate Programmed as Buy
By Chris Shaw
Programmed Maintenance Services ((PRG)) yesterday beat market expectations in delivering a full year net profit after tax of $31.2 million, which was comfortably ahead of consensus for a result of around $29.7 million and represents growth of 11% in year-on-year terms.
Divisional earnings were mixed, the Workforce operations posting flat performance, while strength in the resources division was enough to offset weakness in the Property and Infrastructure operations. In JP Morgan's view this highlights the two-speed nature of the Australian economy at present, while Citi saw the result as a sign of stabilisation within Programmed's business following several years of more volatile earnings.
The standout of the result according to RBS Australia was operating cash flow, which increased by $43 million. This allowed Programmed to cut net debt to $88 million, while lifting net interest cover by 31%. Balance sheet metrics for Programmed are now seen as the strongest for the past six years.
Another positive in RBS's view is Programmed delivered on earnings expectations for FY12 despite challenging macro conditions and a number of downgrades elsewhere in the Small Cap universe. Looking ahead, the broker sees delivery of further growth in FY13 as readily achievable given the additional contributions from recently completed acquisitions and leverage to high demand in the oil and gas sector.
Specific earnings guidance for FY13 was not offered but management at Programmed has indicated moderate growth should be achieved. To reflect both the result and the expectation of further growth in the coming year, brokers have adjusted earnings estimates.
As examples, Citi has lifted its earnings per share forecasts by 1-8% through FY14, while RBS Australia has trimmed its numbers by 2-3%. Consensus EPS forecasts for Programmed according to the FNArena database stand at 29.3c for FY13 and 31.8c for FY14.
If Programmed delivers on FY13 earnings expectations there appears to be value on offer, as on JP Morgan's numbers the stock is trading at a discount of around 35% to the Small Industrial Index. This relative discount is expected to narrow in the coming year as other companies in the index report and earnings expectations for FY13 moderate.
Deutsche Bank similarly suggests valuation for Programmed will look compelling if modest earnings growth can be achieved in FY13. An attractive dividend yield of better than 6.0% in FY13 should also support the share price in the broker's view.
Having previously rated Programmed as Neutral, Citi has upgraded to a Buy rating post the full year earnings result. As well as value on offer at current levels, Citi is positive on the improved earnings visibility on offer from Programmed.
Factoring in Citi's upgrade, the FNArena database shows Programmed is now rated as Buy by all seven brokers to cover the stock. The consensus price target is $2.78, up from $2.58 prior to the result, with targets ranging from JP Morgan at $2.68 to Citi at $2.92.
Shares in Programmed today are down slightly in a weaker market and as at 11.00am the stock was 1c lower at $2.37. This compares to a range over the past year of $1.625 to $2.70 and implies upside of around 17% relative to the consensus price target in the FNArena database.
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