Strong Earnings Growth Suggests More Upside In AJ Lucas

This story features AJ LUCAS GROUP LIMITED. For more info SHARE ANALYSIS: AJL

By Chris Shaw

A year ago shares in AJ Lucas ((AJL)) were trading at less than $1.50 per share but fast forward a year and the share price of the infrastructure services provider has soared to more than $4.50, with Intersuisse suggesting there is more upside yet to come.

Accordingly the broker rates the stock as a Buy, pointing out the group’s core drilling, pipeline and construction activities are all set to deliver solid growth this year, while yesterday’s deal with Sydney Gas ((SGL)) to develop that company’s coal seam gas assets adds some blue sky.

The deal will see AJ Lucas take a 15% interest in Sydney Gas at 38c per share with options over an additional 5% of the shares on issue (pending shareholder approval), while Sydney Gas will access the group’s management personnel and drilling resources in coming years. AJ Lucas may also provide some equity capital to accelerate the exploration and development of Sydney Gas’s Sydney Basin assets.

While the deal is likely to take some time to deliver results this doesn’t impact on the solid outlook already in place, as Intersuisse’s forecasts call for revenue to grow from last financial year’s $216.4 million to around $350 million this year, while profits are expected to increase to $14.6 million this year and $18.7 million in FY09 from last year’s $6.4 million.

If the broker’s forecasts are correct the stock would be trading on a FY08 P/E (price to earnings) ratio of 17.9x, falling to 14.2x in FY09, which does not appear expensive given the growth expectations the broker has for the company.

At current prices the company is capitalised at around $250 million and so remains under the radar for many investors and analysts, though the FNArena database shows ABN Amro also covers the company. It rates the stock as a Hold, though has not updated its view since downgrading its rating to Hold from Buy on the back of share price gains last October.

Shares in AJ Lucas today are down modestly and as at 2.35pm the stock was 18c lower at $4.52.

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