Australia | Feb 16 2010
By Chris Shaw
Crane Group ((CRG)) reported a headline interim net profit result of $18 million and this was better than some in the market had expected. However, the result fell short at the EBITDA (earnings before interest, tax, depreciation and amortisation) level plus with management issued a profit warning, lowering full year guidance. Hence why stockbroking analysts have lowered their forecasts for the company.
Full year guidance is now for earnings of around $36.7 million, down from previous guidance of $39.5 million offered at the company's AGM last year.
Macquarie suggests the result can be split into a couple of areas as Tradelink continues to turnaround, with EBITA (earnings before interest, tax and amortisation) margins of 4.2% the divison's highest since 2003. This implies further potential upside in Macquarie's view as industry benchmark margins are 5-6%, meaning there remains scope for further earnings growth from this division, especially as new stores will continue to be opened.
On the flip side Iplex continues to struggle, with sales expected to fall this year by another 25% in FY10 to around $511 million, down from $680 million in FY09 and a peak in FY08 of $790 million. The weakness reflects a hiatus in water and civil infrastructure projects, though Macquarie expects some recovery in sales in FY11 when project activity returns.
Elsewhere Macquarie was positive on Crane's improved balance sheet, with net debt to equity down to 29% now against the 33.6% recorded in FY09. This implies interest cover of about 3.4 times in FY10, while Deutsche Bank notes net debt has declined from $278 million in 2008 to $188 million in the December half.
Bank of America Merrill Lynch notes excess plastic and other pipe capacity is increasing the competitive environment and this means earnings growth from Iplex is being delayed, something that gives the stockbroker less near-term confidence in any earnings recovery for the group as a whole.
This also supports Merrill's view the stock should not trade at a premium to the Small Industrials Index, while on its numbers Crane is trading at a 10% premium to the index given a current earnings multiple of around 14 times FY11 earnings.
This is too sharp an earnings recovery profile being priced in by the market, in Merrill's view, as it reflects somewhat aggressive assumptions of 155,000 housing starts and a 4.5% EBIT margin for Tradelink in FY11. BA-ML now doesn't expect any recovery in water infrastructure spending to materialise before FY12.
To reflect its more conservative outlook assumptions, Merrill's has cut its earnings per share (EPS) forecasts to 46.2c for FY10 and 64.8c in FY11, down 12% and 14% respectively post the interim result, plus the stockbroker downgrades to an Underperform rating from Buy previously.
In contrast, Deutsche Bank continues to rate the stock as a Buy as while it too has cut its forecasts for FY10 and FY11 by 6% and 7% respectively to EPS outcomes of 48c and 73c, Deutsche notes lead Australian and New Zealand housing indicators are improving. As a result Deutsche Bank sees FY12 as when the company is likely to be generating closer to mid-cycle earnings and on this basis Crane offers some value in its view.
Macquarie has also turned more positive, upgrading to an Outperform rating from Neutral as its view is Australia should enjoy a mild housing recovery combined with an improvement in civil and water infrastructure projects and this combination should deliver strong earnings growth for Crane in coming years.
Macquarie's EPS forecasts are for 45.8c in FY10, 68.9c in FY11 and 83.1c in FY12, while consensus forecasts according to the FNArena database stand at 50.9c this year and 71.9c in FY11. A return to mid-cycle earnings would suggest strong earnings growth in later years as Macquarie estimates mid-cycle earnings before interest and tax should be in the $115-$120 million range, which compares to its current FY11 forecast of $90.5 million.
Post the result the FNArena database shows a total of three Buys, one Accumulate, five Holds and one Underperform on Crane, with an average price target of $9.98, down from $10.46 prior to the interim result.
Shares in Crane today are weaker in an overall buoyant market. As at 12.15pm the stock was down 21c at $8.61, which compares to a range over the past 12 months of $6.32 to $11.66.
