Fleetwood ‘s Upside Constrained

This story features FLEETWOOD LIMITED. For more info SHARE ANALYSIS: FWD

– Fleetwood enjoying growth in recreational vehicles demand
– Manufactured accommodation division being hurt by strong $A
– Fair value at current levels according to Moelis
 

By Chris Shaw

Fleetwood Corporation ((FWD)) has been one of a number of Australian mining services companies to benefit from the commodity price boom. This has been reflected in solid share price performance, Fleetwood's price rising from around $8.00 in March of last year to around $11.50 now. But Fleetwood's "mining services" tag belies the fact it really is a manufacturer of caravans, mobile homes and temporary accommodation modules. It is the latter which ties it into the mining boom, while the former products are linked to both recreation and retirement (ie the "grey nomad" boom).

A solid interim result was delivered last month, stockbroker Moelis suggesting the standout was the Recreational Vehicles division. This division showed revenue growth of 24% and earnings before interest and tax growth of 53%, this driven by a demand recovery from the self-funded retiree sector.

A post GFC catch-up should ensure sales growth from this division though FY13, though Moelis suggests a tightening skilled labour environment is likely to restrict margins in a similar way to that which occurred in FY07-08.

The manufactured accommodation operations, which were boosted by the BRB Modular acquisition in August last year, saw revenues for the half more than double. Earnings growth was more modest at 54%, with the Searipple village the major contributor to the division.

Searipple is currently under a take-or-pay contract with Woodside ((WPL)) that Moelis expects will be extended beyond the current July 1 expiry. If Woodside were to finish the contract, high occupancy in the village should be maintained given good underlying demand in the region.

While a number of large resources village tenders are expected in the next three to six months, Moelis doesn't expect Fleetwood will be a major player as the domestic manufacturing base makes contract wins less likely given the strong Australian dollar. 

If Fleetwood were to secure a single large contract of around $100 million, Moelis expects the impact would equate to a double-digit upgrade to existing earnings per share (EPS) forecasts. Sales in general for the manufactured accommodation division should be supported by post-flood rebuilding activity in Queensland.

Moelis currently forecasts EPS for Fleetwood of 90.1c this year, 102.1c in FY12 and 108.9c in FY13. These forecasts compare to consensus estimates according to the FNArena database of 89.7c in FY11 and 97.5c in FY12.

Based on its forecasts, Moelis estimates Fleetwood is trading on a FY11 earnings multiple of 12.6 times, while offering a yield of a little more than 6.0%. The major issue for Moelis is Fleetwood doesn't offer significant enough leverage to a resources boom, this concern underpinning a Hold rating.

As Moelis points out, with full occupancy at Searipple and the strong Australian dollar making domestic manufacturing less competitive, such an earnings multiple appears appropriate for Fleetwood's defensive earnings attributes.

A majority in the market appear to agree, as the FNArena database shows Fleetwood is rated as Buy twice and Hold three times. UBS and RBS Australia both expect solid earnings growth and so rate the stock as a Buy, while Hold ratings from JP Morgan, Credit Suisse and Macquarie are all valuation calls.

The consensus price target according to the database is $14.06, which compares to Moelis's target of $11.50. Shares in Fleetwood today are higher and as at 11.15am the stock was up 24c at $11.63.

Over the past year Fleetwood shares have traded in a range of $8.00 to $14.25, the current share price implying upside of around 20% to the consensus target in the FNArena database.

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