Australia | Aug 18 2009
By Chris Shaw
While the economic downturn has been tough for advertising companies Photon Group ((PGA)) managed to deliver what in the view of Bank of America Merrill Lynch was a solid full year operational result. Reported net profit was $21.4 million and while this was a little below the broker’s forecast of $25.7 million, it suggests the difference can be attributed to some non-cash items.
Accompanying the result was news of an equity raising, with the company to make an institutional placement at $1.85 per share and a rights issue at $1.50 per share to raise a total of $114.6 million. The proceeds will be used to pay down group debt, though given the number of shares to be issued the money raising operation will prove to be highly dilutive to earnings per share (EPS), UBS estimating by as much as 31% in FY10 and 34% in FY11.
UBS has thus further lowered its EPS estimates to reflect its view the result was somewhat disappointing given it came in below previous guidance, which UBS suggests is an indication of some earnings visbility issues. This combined with recent share price gains leaves the stock fair value in UBS’s view, so post the result the stockbroker downgrades to Neutral from Buy.
Macquarie has gone the other way and upgraded to Outperform from Neutral, suggesting while the equity raising is dilutive it largely puts to rest questions over the group’s debt outlook. As well as improving the company’s leverage ratio from what would have been 1.8x underlying FY09 EBITDA (earnings before interest, tax, depreciation and amortisation) to around 2.3x, Macquarie sees forecast net interest cover increase to around 7x, meaning the company’s abillity to service future debt obligations has greatly improved in the broker’s view.
Bank of America Merrill Lynch agrees, similarly upgrading to a Buy rating while suggesting with the capital raising the company can now comfortably meet the expected $116 million in earnout liabilities due over the next four years. With debt issues now largely addressed, the broker sees the market’s focus returning to the group’s operational performance.
Here the news is positive in the broker’s view, as guidance is for high single-digit organic growth, which matches its own estimate. So far in FY10 the company is tracking ahead of the previous corresponding period and internal budgets, which gives the broker greater confidence in its numbers. In reported earnings per share terms BA-ML is forecasting 23.2c in FY10 and 25.8c in FY11, while Macquarie is at 24.8c and 26.1c respectively and UBS is at 22c and 23c.
The attractions of the company, according to both Macquarie and Bank of America Merrill Lynch, is that it has favourable exposure to internet marketing, while its overall portfolio of companies appears to be more resilient than those of its peers.
Macquarie sees additional potential upside from the possibility the group eventually floats its internet and E-Commerce division, which it notes recorded earnings growth of 15% in FY09 compared to its results in the previous year. This leads the broker to suggest there is good value in the stock at current levels given Photon Group shares are trading on a forecast FY11 P/E (price to earnings ratio) of around 9x, while the broker’s estimate for the average small cap multiple for the same year is 12.4x.
Bank of America Merrill Lynch also sees the stock as inexpensive, as on its numbers the shares are trading on an enterprise value to EBITDA multiple of around six times. Post the result the broker has lifted its price target to $3.40 from $1.44, while Macquarie’s target is $2.87.
The average price target according to the FNArena database is now $2.41, up from $1.53 prior to the result, though it should be noted Credit Suisse has yet to update on the stock post the result. The database shows a total of three Buys and two Hold recommendations.
Shares in Photon Group today are weaker and as at 2.30pm the stock was 13c or 5.5% lower at $2.23. This compares to a trading range over the past year of $0.72 to $3.12.
