Australia | Jun 19 2008
By Chris Shaw
Guidance for FY08 from Transpacific Industries ((TPI)) is for net profit after tax to be in a range of $175-$185 million, but according to Austock Securities higher fuel and interest costs, a slower rate of growth via acquisitions and a break-even result from the group’s hydrogenation operations mean the result is likely to be at the lower end of this range.
The outlook in coming years is even tougher according to the broker as continued margin pressure from the time lag between higher fuel costs and the company’s ability to pass these on to customers set the scene for future earnings guidance to disappoint with respect to market expectations.
Currently the market is factoring in organic earnings growth of 15% annually through to FY10 but the broker sees this as a stretch next year as while waste volumes are growing solidly, only a portion of this flows through into revenue growth. When this is combined with the expected margin pressure of higher input costs it means earnings growth is likely to be subdued.
As well, the broker takes the view while the company’s attempts to consolidate the waste management industry will continue there are now a lack of good businesses available, so acquisition-led earnings growth is likely to slow from the pace of previous years.
To reflect this outlook the broker has adjusted its earnings estimates, with its forecast for FY08 in earnings per share terms (EPS) now 60.3c, increasing to 65.7c in FY09. This leaves the broker below the market in FY09 as the FNArena database shows consensus EPS estimates of 59.2c this year and 68.3c next year, while Thomson One Analytics shows median EPS estimates of 61c and 70c respectively.
Given its conservative outlook for next year Austock has downgraded its rating on the stock to Sell from Hold, at the same time cutting its price target to $7.85 from $10.50. Most others covering the stock don’t agree, as the FNArena database shows a total of five Buys, one Accumulate and one Hold recommendation with an average price target of $11.85. This is down from $12.03 earlier this week as ABN Amro trimmed its earnings forecasts and target after an update from the company, the broker citing increased inflationary pressures as a major reason for its adjustments.
JP Morgan kept its forecasts unchanged following the update and continues to expect earnings growth of more than 20% in FY09 and more than 16% in FY10, while Austock expects only 10% organic earnings growth and 9% growth overall next year.
Shares in Transpacific today are down sharply and as at 11.30am the stock was 44c or 5.7% lower at $7.32, which compares to a trading range over the past 12 months of $6.36 to $14.56.