Abundant Upside Ahead For Soul Patts

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            [0] => ((SOL))
            [1] => ((NHC))
            [2] => ((BKW))
            [3] => ((KHF))
            [4] => ((API))
            [5] => ((AOE))
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    [1] => Array
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            [0] => SOL
            [1] => NHC
            [2] => BKW
            [3] => KHF
            [4] => API
            [5] => AOE
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This story features WASHINGTON H. SOUL PATTINSON AND COMPANY LIMITED, and other companies.
For more info SHARE ANALYSIS: SOL
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

A stock with a price to earnings (P/E) ratio of less than 10 times and a yield in excess of 5% would be viewed as cheap on most measures, even allowing for a more subdued outlook for equity prices in coming months as economic growth both in Austalia and globally comes under pressure.

So it is with Washington H Soul Pattinson ((SOL)), which ABN Amro Morgans continues to rate as a Buy given in its view the company offers significant earnings growth in both the medium and longer terms from its diversified asset structure and leverage to both global energy demand and the property sector.

The former comes via the group’s stake in coal play New Hope Corporation ((NHC)), which the broker expects will increase cash flow from around $60 million this year to around $140 million next year and remain at more than $100 million through to FY11 at least as the company attempts to lift output from the record 5.23 million tonnes shipped in 2007 to seven million tonnes by 2010.

This means much of Soul’s earnings growth in the next year of so will be driven by New Hope but beyond this the broker sees scope for upside from the group’s property assets, held through its stake in Brickworks ((BKW)). In its view the Australian housing market has reached its low point and should turnaround sometime in the next 12-24 months, setting the scene for strong earnings growth in later years as well.

Add in the potential for investments that have proven somewhat less successful such as KH Foods ((KHF)) and Australian Pharmaceutical Industries ((API)) to improve and so result in an increase in the value of the stakes held by Soul Pattinson and the broker has lifted its earnings forecasts.

The changes are substantial, with its forecast for FY08 in earnings per share (EPS) terms increasing by 26% to 57.5c, FY09 increasing by 92% to 99.7c and in FY10 by 77% to 92c, which pushes up its valuation and price target to $11.57 from $10.87.

This would put the stock on a normalised P/E of 8.7x in FY09 while with an improvement at Brickworks expected to see dividends increase the shares are forecast to yield 5.75% in FY09, increasing to more than 6% in FY10. Further upside could come from the group’s stake in coal seam player Arrow Energy ((AOE)) given the current interest in that sector, so the broker remains comfortable with its Buy rating.

Despite a market capitalisation in excess of $2.0 billion the company receives little coverage in the Australian market, the FNArena database showing Aspect Huntley is the only other to research the stock, rating it as an Accumulate. ABN Amro’s price target of $11.57 is well in excess of the current share price, the stock this morning trading 4c higher at $9.04. This compares to a trading range of $6.70 to $10.40 over the past 12 months.

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