Australia | Aug 26 2009
By Chris Shaw
Fibre optic network and infrastructure provider Pipe Networks ((PWK)) has delivered a strong FY09 earnings result, reporting net profit of $10.5 million on sales of just under $50 million for the year.
The result didn’t surprise the market given recent earnings guidance from management, though as Citi points out, operating cash flows of just more than $24 million were better than the $13 million it had expected thanks to a favourable working capital outcome.
The result itself has caused brokers to make minor adjustments to forecasts, Bank of America Merrill Lynch lifting its numbers given it now expects slightly higher domestic revenues in coming years. BA-ML also anticipates improved margins given any extra domestic sales should be on the group’s existing fibre network rather than requiring new construction spending.
As a result the broker’s earnings per share (EPS) forecasts now stand at 36.8c for FY10 and 36.7c for FY11, while Citi is forecasting 38.3c and 30.8c respectively. With RBS Australia forecasting 33c and 42.7c respectively, consensus EPS estimates according to the FNArena database now stand at 36c for FY10 and 36.7c for FY11.
While this doesn’t suggest much in the way of earnings growth, Bank of America Merrill Lynch sees earnings risk as to the upside, largely as the company has now completed the final splice and transmitted the first light signal on its cable between Sydney and Guam.
Testing of the cable will run for the next month and a full launch is set for early in October, with the broker anticipating over time the cable will see the company double its revenues and net profit with capacity for even more to be achieved as more of the cable’s capacity is used up.
RBS Australia is similarly positive on the outlook for the PPC-1 cable as on its numbers demand should grow annually by around 40% over the next few years, which it suggests is strong enough growth to offset expected pricing pressures.
Citi agrees and also points out the company is well placed to benefit from increasing bandwidth demand domestically, a trend it expects will continue as the National Broadband Network continues to move closer to reality. The other positive in the broker’s view is with FY09 likely to prove to be the peak for capex for the company, its free cash flow position will strengthen going forward.
What the broker doesn’t like is the value on offer at current levels, as it notes the stock has rallied by around 60% since the start of the year. To reflect this the broker has retained its Hold rating, while both RBS Australia and Bank of America Merrill Lynch, the other two brokers to cover the stock in the FNArena universe, both rate the shares as a Buy.
The average price target for Pipe Networks has increased to $5.51 from $4.82, with RBS Australia the most aggressive in lifting its target to $6.04 from $4.82, while Citi increased its target to $5.20 from $4.35. Shares in Pipe Networks today are stronger and as at 12.00pm the stock was up 7c at $4.89. This compares to a range over the past year of $1.88 to $5.18.
