Australia | Dec 10 2009
By Chris Shaw
Prior to an update yesterday consensus earnings per share (EPS) forecasts for Alesco ((ALS)) for FY10 were around the 43c mark but after management indicated the outcome would be more like 34-36c brokers have been quick to reduce their forecasts accordingly.
As examples, UBS has taken 25% off its FY10 forecast and 18.2% from its FY11 numbers and is now expecting EPS of 37c and 53c, while Citi has lowered its numbers by 22-29% to 37.8c and 44.3c respectively. Consensus EPS forecasts according to the FNArena database are now 37.9c for FY10 and 49.4c for FY11 – significantly lower than 24 hours ago.
The news is not all bad however, as Citi suggests the reasons for management’s profit warning are largely timing issues and not fundamental operating problems within the group. Citi sees the problem as subdued sales, which is adding to margin pressures for Alesco as the company attempts to move some high priced stock on hand.
The big issue for the company remains the state of the Australian housing market as Citi points out this accounts for around 60% of Alesco’s revenues and currently activity in the sector remains subdued. Credit Suisse expects an improvement in FY11 however, noting macro leading indicators are slowly turning more positive and there is about a six- to nine-month lag between approval for a detached home and the purchase of a product manufactured by Alesco.
This suggests FY11 forecasts of reasonably strong earnings growth such as indicated by consensus forecasts in the market are achievable, Credit Suisse noting in an average year for the housing market in FY08 Alesco delivered operating EBITA (earnings before interest, tax and amortisation) of $103.2 million while its current forecast for FY11 is relatively conservative at around 15% below that level. Its numbers allow for lower margins, this despite the company having made some improvements on costs.
Citi agrees FY11 will be better as it expects housing starts that year of better than 150,000 and some benefits with respect to margins from a stronger Australian dollar and lower employee numbers. Citi also notes government stimulus measures are really a FY11 story, so Alesco should enjoy some flow-on benefits in that year after what looks likely to be a tough FY10.
Despite the cuts to its earnings estimates, Credit Suisse retains its Outperform rating on Alesco, pointing to a strong balance sheet and reasonable cash flow generation given the bottom of the cycle conditions the company is currently experiencing. As well, CS suggests current earnings multiples are pricing in little in the way of any earnings recovery, meaning the stock is cheap relative to both its peers and its historical trading multiples.
Macquarie also likes the stock enough at current levels from a valuation perspective based on improved earnings in FY11 that it is willing to look past what will be a tough FY10 and retain its Outperform rating. Citi also rates the stock as a Buy but continues to prefer GWA International ((GWT)) in the sector.
Overall the FNArena database shows Alesco is rated as Buy five times and Hold three times, UBS one of those to rate the stock as a Hold given a lack of any clear catalysts at present given the difficult trading environment. The average price target according to the database is $5.00, down from $5.09 prior to the profit warning.
Shares in Alesco today are slightly weaker and as at 12.45pm the stock was down 5c at $4.44. Over the past year it has traded in a range of $0.60 to $5.91.
