Bradken Solid, Not Bouncing

This story features AUSTIN ENGINEERING LIMITED. For more info SHARE ANALYSIS: ANG

-Bradken well positioned
-Some doubt as to recovery timing
-New products a major positive
-Chinese foundry to drive growth
 

By Eva Brocklehurst

Bradken's ((BKN)) latest results showed how the company is positioned for when the much-anticipated easing in mining capex happens this year. Half year revenue may have been flat, and the margin improvement smaller than expected, but the company has noticed a bottoming of the cycle, which is a welcome relief to brokers. Be that as it may, BA-Merrill Lynch believes it's too early to talk about a recovery and has taken a harsher line on the fabricator of freight wagons and mining consumables and equipment.

Exposure to producing mines and consumable products provides a high recurring revenue base and Bradken is expanding its reach by entering new regions and developing new products, especially in the Ground Engagement Tools (GET) segment, so this is considered the major positive.

Nevertheless, valuations are considered reasonably full. Looking at the FNArena database, Deutsche Bank's revised $7.10 target captures the improving outlook with a strong margin recovery assumed in near term estimates. Hence the broker has downgraded its recommendation to Hold from Buy. CIMB has ended up with the same target price after its re-valuation and has decided to stay with a Hold recommendation. JP Morgan's target is $7.94, at the top of the range on the database. This broker retains a Buy rating as the stock is trading at a 16% discount to the broker's $8.04 average valuation. BA-ML stands alone on the database with its Sell rating, reflecting its belief the stock is fully valued. The remaining brokers have Buy recommendations – Macquarie, Credit Suisse and UBS. In fact Macquarie and Credit Suisse upgraded their ratings to Buy (or equivalent) on the strength of the Bradken's interim report.

For mining products JP Morgan believes the de-stocking of consumables is ending and continued strength in mine production volumes is likely to support demand. This will offset lower capital sales as miners curtail their capex intentions. Moreover, the push into offshore markets should help diversify the business away from Australia's bulk commodities. CIMB sees Bradken's resilience in being a product supplier rather than a contractor. Moreover, the company has intellectual property rights in its products which stand it in good stead. Macquarie expects a continuation of sales growth and steady margin in the mining products and mineral processing divisions on account of the GET roll-out.

For mineral processing Deutsche Bank finds a healthy order backlog, with facilities expected to operate at full capacity in the second half. Strong gold and copper prices are encouraging high levels of production which, in turn, are supportive of demand for processing. JP Morgan highlights the integration of Norcast and investment in new facilities, which should provide opportunities to consolidate production into lower cost locations. 

Engineered products are suffering from weaker capex intentions but this is offset by easing capacity constraints, and the company is actually better able to meet demand. JP Morgan finds the company has good cost flexibility and, coupled with capacity expansion, expects this should support margins while allowing the company to chase new work. Here is where the downside risk to CIMB's FY13 forecasts lies. The broker notes order cancellations appear to have peaked but a material pick up in fourth quarter is required to achieve its forecasts. The order book stands at $250m, which provides strong coverage for Deutsche Bank's second half FY13 and first half FY14 revenue expectations.

Finally, rail wagon sector demand is seen as weaker in FY13 as miners and other customers curtail intentions. JP Morgan notes production volumes were holding up a base level of demand and, despite the lower price environment, the division should remain competitive going forward, albeit without a pick up in revenue growth in the near term. Macquarie expects steady sales growth and margin expansion in the rail division. BKN will complete fabrication of 700 wagons in the second half, slightly lower than the 934 fabricated in in the first half.

After being a bit cool on the stock after the AGM, Macquarie has made the strongest turnaround in expectations and upgraded its earnings forecasts – 12% and 24% for FY13 and FY14 respectively. The broker says this is due in large part to the inclusion of equity accounted profit associated with Bradken’s 20% stake in Austin Engineering ((ANG)). From an operational perspective, Macquarie's FY13 forecasts are relatively unchanged and FY14 up 8.6%. In contrast, BA-ML finds the contribution from Austin unsustainable, given the consensus outlook for Austin.

The completion and transition to the Chinese foundry in the second half is hailed by both Macquarie and Deutsche Bank as likely to drive improved earnings growth. Macquarie expects it could add material volumes and margin to the business – mostly crawler shoes – over the next 4-5 years, depending on a recovery in end markets.

The last word is from BA-ML: The broker is skeptical that a share price rally based on improving macro sentiment and metals prices will necessarily flow through to higher earnings/valuation over the medium term, citing a relentless focus on costs by the major resource companies. So, the broker continues to see earnings risk in FY13, with its estimates 7% below consensus.

See also Bradken Outlook Filed Down on October 25.
 

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