Australia | Jul 30 2008
By Chris Shaw
Having previously held 17% of steel casings manufacturer AmeriCast mining services group Bradken ((BKN)) has now moved to acquire 100% of the company and will raise around $110 million via an issue of shares at $8.05 each to complete the purchase. On management’s estimates, the deal should be around 10% accretive to earnings in FY09.
The good news doesn’t stop there though as the company has further guided on earnings for FY08, indicating it is confident of recording EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 24% and earnings per share growth of 18% for the year compared to guidance of respective increases of 20% and 15% previously.
According to Credit Suisse this implies increases to consensus earnings forecasts across the market of around 10%, with the risk remaining to the upside in the broker’s view given the continued strength of the mining sector in Australia and the potential for volumes to increase.
Additional acquisitions also offer scope for higher earnings as Credit Suisse notes the group’s balance sheet was already in reasonable shape and so the equity raising is not required, but by doing so management still has a little over $100 million with which to pursue further deals.
As well, Macquarie points out the group has a couple of low margin contracts in its power and cement divisions finishing in the current year, which frees the company up to pursue more lucrative contracts and so boost earnings even further in FY09.
As a result the broker has lifted its FY09 earnings estimate by 24% to 73.5c to reflect the strong order book and positive trend in volumes, while Credit Suisse is at 75.5c for FY09 and UBS is at 73c. The FNArena database shows consensus earnings per share forecasts of 56.7c this year and 74c in FY09, highlighting the company’s strong earnings growth outlook.
With earnings risk quite low Credit Suisse likes the outlook for the shares, particularly as they offer value at current levels in its view given a P/E (price to earnings) multiple for FY09 of 12x and a yield of around 5.5%, fully franked. Following the increase in the broker’s forecasts it has also lifted its price target, setting it at $10.20 against $8.85 prior to the update.
Both Macquarie and UBS have followed suit, the former lifting its price target to $9.19 from $8.49 and the latter to $10.30 from $9.30. This brings the average price target according to the FNArena database to $9.59 from $8.83 previously.
Overall the database shows two Buys, one being Credit Suisse’s upgrade today from Neutral, one Accumulate and two Hold recommendations. Macquarie is one to stay at Hold on the stock, suggesting while the company is well placed to lift future earnings much of this is already priced in at current levels.
Shares in Bradken today are slightly stronger and as at 1.00pm the stock was up 13c at $8.97, which compares to a trading range over the past year of $5.78 to $15.29.