Australia | Jan 21 2011
By Chris Shaw
Contracting Group Transfield Services ((TSE)) offers a relatively defensive exposure to the sector in that around 85% of group revenues come from recurring, maintenance style contracts. As evidence of this, management recently reiterated earnings guidance for FY11 of mid single-digit growth, this assuming foreign exchange rates as at June of last year.
The earnings guidance offered by management indicates earnings growth is solid rather than spectacular, but as stockbroker Moelis points out, growth should get a boost from Transfield's recently announced acquisition of oil and gas service provider Easternwell.
Easternwell specialises in well construction and servicing, operating 65 rigs with around 800 employees. On Moelis's numbers, the acquisition should be 5% accretive to earnings per share (EPS) on a full year basis, the deal having a similar impact on the broker's valuation for the stock.
Factoring in the acquisition, Moelis is forecasting EPS of 27.5c in 2011, rising to 33.4c in 2012 and 36.7c in 2013. Consensus EPS forecasts for Transfield according to the FNArena database stand at 25.1c this year and 29.4c next year, though it should be noted none of the brokers in the database have updated on the stock since prior to Christmas when the Easternwell acquisition was first announced.
On the back of its new earnings forecasts, Moelis has lifted its price target on Transfield to $3.80 from $3.60, which compares to a consensus price target according to the FNArena database of $3.71.
To reflect its revised price target and recent share price weakness, which the stockbroker attributes largely to a recent entitlement offer to shareholders that saw the issue of $294 million in new shares, Moelis has upgraded to a Buy rating.
The broker notes the recent share price decline means Transfield is trading at a cheap level relative to its long-term earnings multiple, this despite the expectation returns on capital employed will remain steady post the Easternwell acquisition.
Moelis's upgrade makes it one of the more aggressive in the market with respect to Transfield, as the FNArena database shows the stock is rated as Buy once and Hold five times by those brokers to cover the stock.
The Buy comes from BA Merrill Lynch, who saw value in the stock even without the Easternwell deal. In contrast, RBS Australia is one to rate Transfield as a Hold, as while the broker sees longer-term benefits from the successful integration of Easternwell, RBS also suggests the stock appears fairly priced around current levels.
Shares in Transfield today are slightly weaker in an overall weaker share market. As at 12.30pm the stock was 3c lower at $3.12. Over the past year the stock has traded in a range of $2.87 to $4.28, the average price target according to the FNArena database implying upside of around 15% from current levels.
