Australia | Oct 13 2008
By Chris Shaw
With economic conditions worsening in Australia corporate earnings are increasingly coming under pressure and Crane Group ((CRG)) has joined the list of companies to downgrade earnings guidance as a result. Management last week advised FY09 earnings were now likely to be flat compared to FY08, with the first half now expected to show a 12% decline before something of a recovery in the second half.
According to Citi the group’s earnings risk remains to the downside post the update, as the detail in the revised guidance suggests an even tougher outlook than the headline number indicates. As well, the broker sees increased earnings risk from the group’s move to acquire an additional 20% in Mitchell Water given that company has only the single contract and is a non-core business in relation to the rest of Crane Group.
On news of the update Citi has lowered its earnings per share (EPS) forecasts by 13% in FY09 and by 21% in FY10, putting its numbers at 90.9c and 95.3c respectively. By contrast, ABN Amro suggests the company faces the risk of falling short of its revised guidance given the potential for adverse movements in foreign exchange markets and worsening economic conditions in the group’s major markets in Australia and New Zealand.
To reflect this the broker has lowered its forecasts from a previously below consensus 95.1c in FY09 and a FY10 forecast of 111.2c to 88.1c and 91.9c respectively. This is again below current guidance by about 8% in FY09 and the broker also points out there remain some quality issues given this guidance includes around $10 million in associated earnings out of total earnings before interest and tax in FY09 of about $128 million.
In ABN Amro’s view, the stock is starting to offer some long-term value around current levels, but the issue of earnings uncertainty is likely to keep this from being realised in the shorter-term, making the stock no more than a Hold at present. UBS disagrees and rates the stock as a Buy despite dropping $4.00 from its price target. The broker’s call is a value play given the share price remains well below its revised valuation post the change to earnings guidance.
There is a note of caution in the broker’s voice though, as it points out regional markets remain weak and South East Queensland is particularly so given a number of corporate collapses there recently, so it takes the view these conditions are unlikely to change too much in the near-term.
Overall, the FNArena database shows Crane Group is rated as Buy four times and Hold four times, the only change coming from GSJB Were post the update, as it dropped its recommendation to a Hold to reflect little chance of outperformance given the difficult operating conditions the company faces. It must be noted not all brokers to cover the stock have yet revised their numbers to reflect the revised guidance from management.
The average price target on the stock according to the database now stands at $13.40, down from $15.17, but further falls to this average appear likely as other brokers update their numbers. Today, shares in Crane Group are stronger thanks to a strong overall market and as at 1.10pm the stock was 19c higher at $9.49. Its trading range over the past year has been $9.19 to $17.49.