Australia | Jul 25 2008
By Chris Shaw
Diversifed products group GUD Holdings ((GUD)) delivered a profit result exactly in line with market expectations yesterday but while Macquarie viewed it as a solid result that was where the good news ended according to other experts. ABN Amro downgraded the stock to Sell from Hold on the expectation of a tougher earnings outlook in coming years.
Profit rose in FY08 by 16% to $41.9 million and management has indicated FY09 earnings should be relatively flat but the broker doesn’t expect the company will be able to do this well given the current tough economic environment.
To reflect this ABN Amro has cut its forecasts by 16% for both FY09 and FY10 and now estimates net profit next year will be around $36.3 million, a forecast close to Macquarie’s $36.5 million estimate. Credit Suisse remains slightly more optimistic at $38.8 million having cut its estimate by a similar amount as ABN Amro.
According to ABN Amro one issue the company will face in the coming year is rising input cost pressures as raw material prices are going up, while at the same time it is unlikely to again see similar offsetting benefits from a stronger Australian dollar as it enjoyed in FY08.
The broker also suggests while the yield on offer is attractive, and at current levels it is close to 7.5%, the market is now more concerned with downside risk and so is likely to be less forgiving given the weak earnings outlook in coming years. Credit Suisse is also more concerned as it notes for earnings guidance to be achieved the group is going to have to be able to pass on its higher input costs, which potentially will impact on demand.
As well the broker suggests the new guidance from management will require stronger performance from the water division and given it has been something of a disappointment of late this remains questionable, especially if the Australian dollar’s rate of appreciation slows or stops.
Macquarie also sees the coming year as a tough one for the Sunbeam consumer products division in particular given the softer retail environment, so it too is somewhat cautious on the group’s prospects in the medium-term. Its Neutral rating reflects this, while overall the FNArena database shows a total of six Holds and ABN Amro’s Sell.
As earnings estimates have come down so too have price targets, the database showing an average target now of $8.72 compared to $9.09 prior to the profit result, the biggest change being ABN Amro’s move to a target of $7.29 from $9.22 previously. It has to be noted though that not all brokerages have updated their view post the latest result release. The median price target according to Thomson One Analytics is $8.90.
Shares in GUD today are down slightly in a weaker overall market and as at 11.30am the stock was 8c lower at $8.20, compared to a range over the past 12 months of $7.36 to $11.65.