Australia | Aug 22 2008
By Chris Shaw
Commodity price falls may be impacting on mining companies, but for many of the mining service companies, there has been far less of an effect. An example is Ausenco ((AAX)), which delivered a first half profit result above most expectations in the marketplace.
Earnings of $28 million for the half compares to Austock Securities’ estimate of $25.5 million and ABN Amro’s $20 million forecast, while an even stronger second half is expected given full year guidance for a profit of between $62-$69 million. The first half result was even more impressive, as it includes an $8 million provision for an incident at the Lumwana mine during the period.
The solid earnings outlook has prompted increases to market forecasts. UBS has added 5-10% to its estimates through to 2010 and ABN Amro lifted its full year profit forecast to $68.6 million from $56.6 million previously. Austock has increased its forecast to $64 million from $57 million, while also noting earnings visibility in coming years has improved.
In earnings per share (EPS) terms, the FNArena database shows consensus forecasts now stand at 75.3c in 2008 and 89.8c in 2009, which compares to a result of 49c in 2007.
Driving earnings growth, according to ABN Amro, was the newly acquired process infrastructure business, while the minerals business also delivered solid gains. The fact the dividend was also higher than it had expected leads the broker to suggest management is very confident in the earnings outlook. UBS agrees and notes with margins and the order book at record levels, further record profits should be achieved.
The major question mark with the result was operating cash flow, which was down more than 200% from the previous corresponding period to minus $25 million. According to ABN Amro this reflects a reversal of advance billings, but should normalise in the December half, and so is not considered a major concern.
Where the company has an advantage, in the view of Austock, is that a large proportion of earnings are derived from its work in the bulk commodity sectors. The broker’s outlook for coal and iron ore continues to look good and this should sustain margins at current high levels. While this underpins much of 2009 earnings expectations, further upside could come from acquisitions in the broker’s view, with the oil and gas sectors believed to be particularly of interest.
On the back of the increases to its earnings estimates, Austock has revised its price target higher, setting it now at $15.00 compared to $14.50 previously. The FNArena database shows some range to targets, with GS JBWere the highest at $16.87 and JP Morgan the most conservative at $15.50. The average price target is $16.34, up from $16.25 prior to the profit result. The median price target according to Thomson One Analytics is $15.50.
In ratings terms, the stock scores a Buy from Austock and three other brokers in the FNArena database, compared to one Accumulate and two Hold recommendations. Macquarie is one to rate the stock as Neutral, suggesting while the outlook appears solid, this is already priced into the stock at current levels.
Today, shares in Ausenco are slightly stronger, in line with the broader market, and as at 11.40am the stock was up 20c at $13.20. This compares to a trading range over the past 12 months of $9.12 to $16.90.