Australia | Nov 28 2013
-Mixed aspects to outlook
-Good cash flow, lower debt
-Enterprise bargaining risk
-Scope for dividend increases
By Eva Brocklehurst
Programmed Maintenance Services ((PRG)), a company that provides facilities management, maintenance and a construction workforce, produced a first half result that was not too hot, not too cold, but was it just right? Broker opinions mostly diverged around what to emphasise most in the outlook, but tended to be on the positive side.
Citi and UBS thought the outlook quite modest and factored into the price already, so decided to downgrade to Neutral from Buy. Macquarie thought the outlook very solid, so upgraded to Outperform from Neutral.
The first half did show a change in emphasis compared with FY13. Whereas the preceding year was characterised by weakness on the east coast that outweighed the booming west, the start to FY14 appears to be the opposite. Contract completions in WA meant that the focus was on east coast where growth in property and infrastructure led the way. The second half is expected to be better, as there is a high levels of work-in-hand and the Wheatstone and Ichthys LNG contracts will come on line.
So why did Citi and UBS downgrade? Now that all the three divisions have been restructured, Programmed is a more balanced and more capital efficient company and Citi thinks the stock is fairly priced. Moreover, FY14 is expected to be subdued, with flat demand for new staff and reduced government expenditure. This will be offset somewhat by outsourcing opportunities and the contracts in the oil and gas sector. UBS also highlights the restructuring that has delivered improving returns. Nevertheless, the broker considers the market has priced this in as the stock is up 58% so far in 2013. This prefaces a downgrade to a Neutral rating.
To Macquarie, the valuation is undemanding. Hence, the upgrade. The company has around 40% of earnings from the oil and gas business and a strong balance sheet so there's scope to perform well. Moreover, net debt is now down to 10.1% relatively to equity and this, in the broker's view, allowed for the 20% increase to the interim dividend to 6c. Property and infrastructure earnings were up strongly and the KLM business returned to profit. The workforce earnings grew despite a fall in revenue and Macquarie thinks this business should benefit as the domestic economy improves. The main risk to the outlook is the marine enterprise bargaining negotiations, as a prolonged dispute has potential to disrupt earnings.
CIMB also thinks the stock looks cheap relative to the market, despite trading above the consistent 6-year average. The broker thinks the stock is well positioned to benefit from the recovering domestic economy but the enterprise bargaining issue is a key risk. The broker points to the fact these work stoppages were a major driver of marine earnings falling from the second half of FY10 to the first half of FY11. The broker is conservative with regard to the growth prospects for resources. The company may have guided to a stronger second half, driven primarily by increased offshore work, but the potential threat from industrial action hampers this view. Once this can be discounted then the outlook is solid.
The reversal in the earnings trend was evident to JP Morgan but the broker thinks Programmed requires a recovery in general economic conditions before it can gain momentum. This is considered unlikely in the near term. The property and infrastructure and the workforce divisions require a shift in business confidence, and an increase in labour hire and maintenance programs. Then there's the risk with the enterprise bargaining that's currently in train. The broker is confident a higher level of earnings can be maintained in resources over the medium term but this is now reflected in forecasts.
Credit Suisse also sees some blue sky emerging, despite the weakness in onshore mining demand. This increased confidence is based on the property and infrastructure division with suggestions an end to the deferring of maintenance is occurring. Moreover, the company is capitalising on the oil and gas opportunities, witness Gorgon, Wheatstone and Ichthys contracts. That said, this broker also believes that the risks remain elevated because outer-year earnings growth is dependent on a macro-led recovery and there's limited visibility on when this will happen. Management is projecting an overall result in FY14 that's similar to FY13.
Several brokers, while keeping their ratings tepid, raised price targets substantially after the result to capture the higher market multiples in evidence. Deutsche Bank was one, noting the stock is now trading on FY14 price/earnings of 10.5 times and a strong yield, making it attractive. The broker notes Programmed is paying down debt at a faster rate than had been expected and dividends are increasing. Free cash flow is expected to stay strong and provide the scope for increases to the dividend, debt reductions or acquisitions, or all of these. It adds up to a Buy rating in the broker's opinion.
On the FNArena database there are two Buy ratings, five Hold and no Sell. The consensus target is $3.13, suggesting 4.6% upside to the last share price. This compares with $2.57 ahead of the results. Targets range from $2.90 to $3.50. The dividend yield on FY14 forecasts is 5.4% and 5.8% on FY15.
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