Australia | May 27 2009
By Chris Shaw
When the downturn in commodity prices ran its course last year, brokers turned very negative on Campbell Brothers ((CPB)) given the scope for earnings to fall heavily in its key laboratory services division, which does a lot of sample analysis work for the mining industry.
But just as there is talk of “green shoots” in the global economy JP Morgan suggests there are now signs the company has seen the bottom of the cycle in terms of global minerals testing volumes. What this means for the company is there is less chance of an earnings disappointment in coming years, which had been factored in prior to a FY09 profit result that largely met market expectations.
The company reported a profit of $106.2 million and more than doubled its operating cash flow, which supports the broker’s view the group’s balance sheet is comfortably geared at present. As well, Campbell has responded to the downturn in testing volumes by cutting staff, a necessary move in the broker’s view given the industry is really a volume game and one that allowed margins to be retained at better than 20%.
This, in the broker’s view, shows how quickly things can turn around as with margins being sustainable, an uplift in volumes should flow through to bottom line earnings. However, JP Morgan believes such an outcome is not likely in FY10 as this year will be tougher than the one just gone (implying investors should look beyond the year ahead).
Post the result, JP Morgan makes minor increases to its estimates and is now forecasting earnings per share (EPS) of 153.2c in FY10 and 171.9c in FY11, compared to the 201.9c achieved in FY09. At the same time, the stockbroker lifts its price target to $18.94 from $12.14, a change enough to justify an upgrade in rating to Overweight from Neutral.
RBS Australia has matched the JP Morgan upgrade, moving to a Buy given its view an increased diversity in the group’s operations, solid dividend payouts given a yield of better than 6% and good capital management will prove supportive for the share price in the coming more difficult operational year.
As with JP Morgan, the broker has made minor adjustments to its estimates modestly post the FY09 result, its EPS forecasts now standing at 165.3c in FY10 and 180.1c in FY11. This compares to consensus estimates according to the FNArena database of 154.2c and 171.3c.
On its numbers RBS Australia suggests the stock is currently trading on an earnings multiple of around 9x, which it considers is good value for investors willing to look through the cycle at what the company could deliver. Bank of America-Merrill Lynch has gone the other way and cut its FY10 estimate by around 10%, though it points out this is largely a reflection of movements on foreign exchange markets and is not an operational issue.
The key to BA-ML’s Buy rating is the sustainability of margins in the laboratory services operations, the broker suggesting the company’s ability to prove this division is scaleable in both directions is the driving factor behind the stock premium rating on the market.
Macquarie is the odd one out, taking the view the downturn in activity in the resources sector is likely to see earnings fall by 40% in FY10, a drop far more substantial than others in the market are factoring in. The broker argues if its expectations for earnings prove to be correct then the current 14x earnings multiple for the stock is too high, which would see the market move more in line with its Underperform rating.
Overall the FNArena database shows the company is rated as Buy three times, Hold once and Reduce/Underperform twice, while its average target has increased to $19.53 from $17.76 post the FY09 result. Shares in Campbell Brothers today are stronger and as at 12.30pm the stock was up 89c or better than 5% at $17.29. This compares to a trading range over the past year of $8.64 to $37.90.