Australia | Sep 17 2008
By Chris Shaw
Slower economic activity in both Australia and New Zealand, and the weaker housing market in Australia in particular, has made the past few months tough for wholesale distributor Alesco ((ALS)). Management’s update at the company’s annual general meeting suggests investors shouldn’t expect a turnaround anytime soon.
As ABN Amro notes, the current financial year has suffered from a weak start as cost pressures in particular continue to bite. The update has caused the broker to lower its earnings estimates by 9% in coming years from what were already bottom of the market numbers.
With normalised earnings per share (EPS) to be down by 30-35% in the first half of FY09, the broker’s new EPS estimates are 63.4c in FY09 and 70.4c in FY10, while Credit Suisse and JP Morgan have similarly cut their numbers and now forecast EPS of 64.1c this year and 72.5c in FY10 for the former and 64.5c and 77.9c respectively for the latter.
This puts FY09 earnings at less than the slightly more than 83c the company earned in FY08, with management indicating this year would fall short of last year unless there was a significant lift in the state of the macro economy, which appears unlikely at present.
One potential ray of light for shareholders is management’s new focus on reducing costs within the group. ABN Amro notes this aggressive targeting of costs may mean an improved earnings performance in the second half of this year. JP Morgan is not so sure though, suggesting there is still some doubt as to whether the measures announced at the AGM will be enough to return the company to its previous growth trajectory.
Credit Suisse tends to agree with the JP Morgan view and sees scope for further downgrades to earnings given the outlook for a weaker economy in Australia. This uncertainty keeps the broker from taking a more positive view given the value on offer, as it notes at current levels the stock is trading well below its mid-cycle valuation.
While retaining its Neutral rating on the stock, the broker does suggest the current yield of more than 11% should offer some share price support, though this might not be enough if earnings are downgraded even further. ABN Amro adopts a similar approach to the stock, as while it too sees long-term value, it expects conditions will worsen further for the company before they improve.
JP Morgan has adopted a tougher view in terms of how management should react to the current difficult conditions, pointing out there is enough diversification across the company that group earnings should still be able to grow even in a less than ideal environment. The broker suggests management will need to look at what sort of returns all its business units are generating and then decide if any need to be offloaded, rather than simply hoping cost cutting can return the group to a position of growing earnings.
Despite this view the broker retains its Overweight rating, largely given the attractive yield, as this means shareholders are being paid to wait for the eventual recovery in earnings. Most in the market don’t agree though, as the FNArena database shows the stock is rated as Buy twice compared to six Hold ratings.
With earnings being revised lower, price targets for the stock have fallen. The database shows an average target of $6.81 now, which compares to $7.50 prior to the AGM. Today, shares in Alesco are weaker despite a stronger overall market and as at 12.05pm the stock was down 27c or 4.6% at $5.63. This compares to a trading range over the past 12 months of $5.55 to $13.53.