Australia | Aug 13 2014
-Strong cost control, cash flow
-Scope for restructuring benefits
-Recovery still shaky
-Plans to diversify
By Eva Brocklehurst
Conditions for Bradken ((BKN)) appear to be stabilising and there is a glimmer of hope for a turnaround stemming from the order book. Restructuring is delivering promised savings and improving the company's competitive position. Still, brokers diverge on how much upside to factor into the outlook. To Deutsche Bank the likelihood of a meaningful recovery is low. Conditions are patchy and the mining sector is subject to continuing pressure. Beyond any re-stocking the broker expects longer term structural and competitive issues will weigh on this capital goods and mining consumables business.
This does not bother JP Morgan. The broker liked the FY14 results, finding evidence of strong cost control and an improved business mix. The other key feature was good cash flow, allowing a higher dividend to be paid and a reduction in net debt. This is expected to continue. Demand for core mining consumables remains firm while mine production volumes are solid. The broker believes investors are being compensated for the balance of risks and retains an Overweight rating.
BA-Merrill Lynch errs on the side of caution, suspecting that margins are unlikely to grow further. The evidence is mounting that the bottom of the mining capital cycle may be at hand and Merrills estimates that the cumulative order intake was 7% higher in the second half. Despite an improvement in gross profit margin to 33.3%, the broker thinks this is as good as it gets. Yes, there is some upside but not enough to warrant changing a Neutral recommendation, in the broker's opinion.
Macquarie, too, envisages a bottom in the cycle is at a hand. Order books have been slow to recover and remain tilted towards maintenance, as capital expenditure programs are constrained among key customers. The broker believes the downside risk is limited now while management commentary points to a more expansionary and acquisitive outlook. The company has intentions to diversify end-market exposure, geographically and by industry. All up, this provides enough confidence for Macquarie to upgrade to Outperform from Neutral.
The positives add up for Goldman Sachs too. The broker believes Bradken is better placed than others in the sector to withstand weak conditions in mining, given the focus on consumables that are exposed to growth in mining production volumes.
Credit Suisse accepts the company is improving its business, with scope for restructuring benefits over and above those already announced, while the balance sheet is on a de-leveraging trajectory. However, the broker believes the valuation is already taking account of this. Earnings may have levelled out but capital products look set to remain weak. Mineral processing is firm and there is strength in the energy market. Credit Suisse is not enthused and moves to Neutral from Outperform given recent stock price outperformance. UBS also sticks with a cautious view, not sure when the capital cycle in mining will turn but conceding there is upside risk as the stock is trading at a low price/earnings multiple.
Orders are bumping along the bottom and this is not good evidence of a cyclical recovery, in Morgan Stanley's view. What enhances the outlook for this broker is that there is growth outside of the cycle. Restructuring initiatives and lower gearing mean the business can grow independently of the cyclical turnaround. The broker believes the company's growth strategy is intact with volume coming from from mining production, and there is scope for additional margin and acquisitions. The broker points out the company is confident in the potential for both fast pay-back on cost reduction initiatives and synergistic acquisitions in the coming year.
CIMB is happy that revenue trends have not deteriorated further and there is momentum in the order book. The broker believes expectations for FY15 are reasonable and is increasingly confident the cost savings can be retained. The broker notes this stock has consistently been regarded as a defensive and high quality player in a sector that has big challenges. Concerns over the balance sheet are now reduced, not that CIMB was overly worried on this score. The broker cites evidence that, for the past two down cycles, Bradken has proven it can organically de-leverage in a falling market. The broker considers the valuation argument is now compelling, upgrading to Add from Hold.
Summing up the views, FNArena's database has three Buy and four Hold ratings. The consensus target is $4.99, suggesting 3.0% upside to the last share price, and compares with $4.31 ahead of the result release. Dividend yield on FY15 and FY16 forecasts is 5.9% and 6.6% respectively.
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