Australia | Jan 29 2009
By Chris Shaw
Companies exposed to the Australian housing sector offer little to attract investors at present given the risk of earnings disappointment from what are extremely tough conditions, but it is still worth identifying what are the better picks in the sector for when conditions eventually improve.
According to Deutsche Bank, the clear top play is GWA International ((GWT)) as the manufacturer of household and consumer products such as furniture and bathroom fixtures has a strong balance sheet and leverage to an eventual turnaround in economic conditions.
The broker has initiated coverage on the stock today with a Hold rating, wanting to be more positive but prevented from doing so by the fact the risk to earnings remains to the downside in the short-term. Management has all but admitted as much by stating it is unable to deliver earnings guidance in the current environment, which includes housing starts of just 145,000 units at present compared to a historical high of around 180,000.
Supporting the broker’s cautious view is the fact a number of other companies in the sector have already lowered earnings guidance including Alesco ((ALS)), Crane Group ((CRG)) and Boral ((BLD)).
On the broker’s numbers, GWA International represents only fair value at present as the currently depressed earnings outlook has the stock trading in line with the broker’s target price of $2.50. The stock has outperformed the market in relative terms over the past 12 months.
At the same time, the stockbroker points out historically the shares represent good value when they are trading below the stock’s historical P/E (price to earnings ratio) average of 13.5x on low to mid-cycle earnings. The broker’s current numbers are showing a FY09 P/E of 13.4x at present.
With a turnaround in the sector expected in coming years FY09 should be the low point of the earnings cycle in the broker’s view, as its EPS (earnings per share) forecasts call for 19c this year but increases to 20c in FY10 and 21c in FY11. The FNArena database shows consensus EPS forecasts of 18.3c and 19.9c respectively in FY09 and FY10.
The other attraction in Deutsche’s view is the dividend yield, as on its numbers the company will pay out dividends of 18c both this year and in FY10, rising to 19c in FY11. With consensus estimates according to FNArena suggesting dividends of 18c and 19c in FY09 and FY10, the stock is yielding in excess of 7%, fully franked.
Aside from Deutsche Bank, the FNArena database shows the stock is rated as Hold three times and Sell twice, with an average price target of $2.47. UBS has today moved to Neutral from Sell after noting the stock has actually underperformed the market over the past month. UBS too expects some sign of improvement in the housing sector over the course of 2009.
Shares in GWT International today are slightly higher and as at 2.55pm the stock was up 4c at $2.55. Over the past year the shares have traded in a range of $2.01 to $3.67.