Australia | Jul 22 2009
By Chris Shaw
To deal with a mounting debt problem waste management group Transpacific Industries ((TPI)) decided on an entitlement issue, with the institutional component of the issue raising $560 million at $1.20 per share and a retail entitlement offer to add a further $176 million to the company’s coffers.
As well, sub-underwriter of the retail offer Warburg Pincus has agreed to take a further $64.5 million in shares at $1.80 each, a move that will see it become the group’s largest shareholder with a stake of somewhere between 19.9% and 34.3%.
While the equity raising has addressed much of the group’s debt concerns, JP Morgan points out there remains a significant level of uncertainty with respect to group earnings, especially given management has recently disclosed some issues with FY08 earnings and the market has seen a number of downgrades to FY09 forecasts.
This leaves the broker cautious on the group’s outlook, notwithstanding what it suggests appears good value in the stock at current levels given JP Morgan’s price target of $1.60 is 7% below its valuation for the shares.
The problem is the company’s valuation has a high level of sensitivity with respect to earnings according to the broker’s analysis, as it estimates if FY10 EBITDA (earnings before interest, tax, depreciation and amortisation) was $420 million its enterprise value on the group would be $1.28 but if EBITDA came in at $480 million this value would increase to $1.91.
The other issue in the broker’s view is given around 25% of group earnings are cyclical with respect to volumes in construction and industrial waste and commercial vehicle sales, these sectors look set to remain weak through the first half of FY10 and into the second half, which may overshadow the defensive portion of group earnings and the 25% of earnings that could receive a boost from rising commodity prices.
The earnings uncertainty means a Neutral rating is justified in the broker’s view, while the FNArena database shows the stock is rated as Buy just once compared to Hold four times and one recommendation for shareholders to take up the retail offer.
Credit Suisse’s Hold rating equally reflects the view there are still many question marks over the company’s future and certainly too many to take an aggressive view on the stock. Also of note, the lone Buy rating comes from RBS Australia but dates back to March, meaning the broker may still change its view when it factors in the recapitalisation the company has undergone.
Shares in Transpacific today are weaker and as at 12.25pm were down 3.5c at $1.19. The stock has traded in a range of $1.03 to $8.16 over the past 12 months.
