Australia | May 22 2008
By Chris Shaw
Having guided on earnings last month the AWB ((AWB)) first-half profit result of $48.6 million pre-abnormals was broadly in line with broker forecasts, though in the view of JP Morgan it disappointed in quality terms as the earnings mix was skewed towards the lower multiple trading businesses.
The other major issue in the broker’s view, and the one that justifies its Underweight rating on the stock, is that the result didn’t address the tough capital position the company finds itself in, as during the period its working capital increased by almost 80% to $1.16 billion.
This leads the broker to suggest management has only a couple of options, being to either raise equity, slow down the expansion of its international business to free up some equity or limit its participation in wheat exports. If either of the latter two choices were made JP Morgan sees substantial downside risk to its earnings forecasts longer-term, while the first option would also put downward pressure on the share price in its view.
Factoring in the result the broker has trimmed its forecasts modestly, such that it is now forecasting normalised earnings per share (EPS) of 24.9c this year and 26.7c in FY09, which compares to Macquarie at 26.4c this year and 21.8c in FY09 and Deutsche Bank at 25c for both years. Consensus forecasts according to the FNArena database are 25.2c this year and 24.7c in FY09.
While JP Morgan is the only broker in the FNArena database to rate the stock as Underweight, others to research the company continue to point out the difficulty in forecasting earnings for the company make it tough to generate an appropriate valuation and therefore a rating for the stock.
As an example ABN Amro has lifted its estimates for this year by 33% to 24.3c and in FY09 by 11% to 25.1c post the half-yearly result, while pointing out in its view earnings risk in FY08 remains to the upside if additional rain means a better than expected crop.
In its view the loss of the group’s monopoly position with respect to the wheat desk in Australia, while a negative, is also an opportunity as it opens up new growth options such as entry into new markets the company would not have been able to pursue if it still had the monopoly.
Deutsche Bank points out this diversification is already underway, as the latest result shows only 20% of group earnings now come from wheat pool related activities. The broker notes management is now more focused on driving new revenue streams, but legacy litigation will continue to impact on earnings for the next couple of periods and so make forecasting earnings accurately very difficult.
With that in mind the broker retains its Hold rating, FNArena’s database showing three holds and JP Morgan’s Underweight recommendation. The database shows an average price target of $3.08, compared to $3.01 prior to the result and a median target price according to Thomson One Analytics of $3.10.
While offering some exposure to the soft commodities sector JP Morgan makes the point among the Australian agricultural stocks ABB Grain ((ABB) remains its preferred exposure, while ABN Amro’s summary is while the restructuring is showing some progress more work remains to be done.
Shares in AWB today are weaker in line with the broader market and as at 12.45pm the stock was down 18c or 5.3% at $3.21, which compares to a trading range of $2.02 to $4.38 over the past 12 months.
