Fleetwood Not Unhitched

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

By Eva Brocklehurst

Mining village, transportable accommodation and caravan builder Fleetwood ((FWD)) is considered a quality stock but suffering from depressed occupancy in one of its villages. With a large proportion of recurring revenue and a 7% fully franked yield, RBS Australia believes FWD offers more defensive exposure than its engineering and construction peers but has tagged the company with a Hold rating until it sees an improvement in occupancy rates. The broker has concerns about the Searipple accommodation that FWD built for Rio Tinto ((RIO)) and Woodside ((WPL))  in Karratha, Western Australia. RBS suspects the current low occupancy levels will not turn around soon and Fleetwood will have to lower room rates.

Moreover, RBS expects a loss in the caravan building division. This will occur because the company is relocating its caravan and camper manufacturer, Windsor Caravans, to Western Australia where they will be built at the Coromal Caravans site. The transfer to a combined manufacturing facility provides an opportunity to improve production efficiencies and the designs of both brands but in the short term will be a cost for the balance sheet.

Consensus forecasts for earnings per share from the FNarena database show 89.2c for FY13 and 101.2c for FY14. Changes to RBS' forecasts sees FY13 earnings per share fall to 74c from 98c (24%) . These changes mainly relate to occupancy levels at Searipple coupled with expected lower room rates,  the relocation of Windsor to the west coast plus an increase to the payout ratio assumption to 103% from 83% of retained earnings. The latter shows the broker considers the weakness in the outlook for the stock to be short term in nature. Its higher dividend assumption is based on the fact that FWD has increased its dividends over the last 15 consecutive halves and is anticipating strong growth down the track from Osprey (WA) and Gladstone (QLD) villages. RBS believes these factors support a one-off increase in FWD's payout ratio.

RBS anticipates FWD's FY13 earnings will be heavily weighted to the second half of FY13 as the first half will be weighed down by Windsor relocation costs and margin compression. However, over the medium term, it is forecasting earnings will be underpinned by long-term contracts when Osprey and Gladstone villages come on line. The broker notes its profit forecasts are about 20% below consensus for FY13. Other brokers have a mixed outlook for the stock with Macquarie's last view showing an Outperform and others, albeit showing earlier views, ranging from Underperform to Buy.

FWD's Coromal facility has the capacity to manufacture 60 caravans per week. Currently, it manufactures around 25 per week.While the transfer of Windsor to WA will result in some one-off costs these should be offset in the second half by overhead savings, according to RBS. Consequently, over a full year, relocation of Windsor to WA will have a neutral impact on FY13, the broker said. Looking at this division in FY14 RBS believes the centralising of its manufacturing facility should add an additional $4.5m-5m to earnings. However, it cautions, this needs to be put into context. The division's contribution to FWD's earnings is around just 5%.

RBS values FWD on a blended valuation (Discounted Cash Flow/Price Earnings ratio). Hence the broker's target price falls to $11.42 (from $13.66) based on equal weighting of DCF and target PE of 11.9 times FY13 forecast earnings. Key upside risks to the target price include large contract wins, new facilities coming on line, accommodation shortages developing in Western Australia and Queensland, construction recovery and even increased confidence in retiree domestic travel. On the downside, the main risks are project delays/cancellations, labour shortages, a slowdown in mineral exploration, high petrol prices and increasing unemployment. 

RBS now provides the only Hold rating on Fleetwood in the FNArena database, leaving three Buys and a Sell from Credit Suisse after a good share price run. FY13 consensus forecast earnings show an expectation of a 1.4% fall but this is followed by 13.5% growth in FY14. Forecast yields for FY13-14 are 7.7% and 8.5% respectively. A consensus target price of $12.82 suggests 25% upside at current pricing.

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