Australia | Nov 02 2009
By Chris Shaw
Manufacturing and distributing company Crane Group ((CRG)) suprised the market on Friday with weak earnings guidance for FY10, with management at the annual general meeting indicating net profit for the year was likely to be around 30% lower than for FY09 when significant items are excluded, an outcome 25-30% below market expectations.
According to UBS, the biggest problem appears to be in the Iplex pipes division, which has been the most profitable part of the company over much of the past decade, but is currently struggling given the lumpy nature of contracts for water projects and a weaker market in terms of smaller scale capital works projects.
In contrast, the Tradelink and Industrial Products divisions appear to be performing better than at this time last year, but as UBS notes, the gains here are not enough to offset the weakness in Iplex and ongoing struggles in the New Zealand operations, which account for 15-20% of Crane’s earnings.
Post the revised guidance, brokers have been quick to cut earnings forecasts, RBS Australia lowering its net profit forecast for FY10 by 29% to $40.6 million and its FY11 number by 32% to $51.6 million. In earnings per share terms this implies new forecasts of 52.2c and 65.2c respectively.
Credit Suisse suggests the big surprise in the downgrade in guidance from management is that it comes despite peers indicating conditions were relatively flat rather then weakening. On the news its earnings forecasts have been adjusted down by 29% and 21% respectively in EPS terms to 51.3c and 69.9c for FY10 and FY11, while consensus forecasts according to the FNArena database now stand at 65.5c and 84.5c respectively. It must be noted not all brokers have updated their models for the new guidance, meaning these consensus numbers are likely to come down further in coming sessions.
The other issue for Credit Suisse is there remains scope for further downside risk to earnings if the housing recovery stalls and government water programs, which have already been slow to be implemented, are deferred again. Reflecting this, it argues the stock is not offering value even after the more than 10% fall in the share price on Friday, as on its FY11 numbers the earnings multiple of almost 13 times looks somewhat stretched.
Given this view, Credit Suisse has downgraded its rating to Underperform from Neutral, while RBS Australia downgraded post the revised earnings guidance to Hold from Buy. UBS rates the stock as Neutral, which is a valuation call given Crane shares have underperformed by about 15% over the past couple of months.
Overall, the FNArena database shows Crane Group is rated as Buy twice, Hold six times and Sell twice, the two Buys coming from GSJB Were and Bank of America Merrill Lynch, neither of which has updated to reflect the latest earnings guidance. The average price target on the stock has fallen to $9.96 from $10.64 previously, with Credit Suisse making the biggest change in cutting its target to $8.50 from $11.30.
Shares in Crane Group today have continues to weaken and as at 12.40pm the stock was down 29c or 3.2% at $8.75, which compares to a trading range over the past year of $6.32 to $11.66.
