Small Caps | May 27 2011
– Norfolk delivers high quality FY11 result
– Guidance for FY12 viewed as conservative
– Cheap valuation justifies Buy ratings
By Chris Shaw
Integrated electrical, communications and air-conditioning services provider Norfolk Group ((NFK)) delivered a solid full year earnings result, net profit of $21.1 million representing an increase of 15% in year-on-year terms.
Result quality was high according to RBS Australia as both return on capital and cash realisation improved, while strong operating cash flows allowed for a reduction in net debt. Dividends have also resumed, this coming six months earlier than RBS had expected.
JP Morgan put the result down to good diversity in operations, pointing out the O'Donnell Griffin electrical and communications operations continue to perform well at the same time as margins in the Haden air-conditioning maintenance division remain under strong pressure.
While conditions in the Haden division are expected to be tough for some time, JP Morgan notes demand drivers in the O'Donnell Griffin operations remain strong. This is the result of continued rail sector work on the back of capital investment and infrastructure upgrades, while power is also emerging as an important source of demand for Norfolk's services given increasing demand for both generation and distribution facilities.
Management has offered initial earnings guidance for FY12 of an increase in net profit terms of 5-10%, which RBS suggests is likely to prove conservative. This is because currently contracted revenues for FY12 of $685 million are already 10% ahead of this time last year.
This supports RBS's view Norfolk should easily meet and exceed guidance for FY12, which is reflected in the broker's forecast currently standing about 8% ahead of the current mid-point for guidance for the coming year.
The strong order book also caught JP Morgan's attention as a positive for the year ahead, while the broker suggests there is additional scope for earnings upside from acquisitions given the balance sheet moved into a net cash position over the course of FY11.
Stockbroker Moelis agrees current earnings guidance for FY12 is conservative, though points out the caution is based on management's view earnings in O'Donnell Griffin could plateau next year as larger contracts are more likely to be delivered in FY13.
Post Norfolk's profit result, Moelis has increased its earnings per share (EPS) forecasts by 1% to 14.5c in FY12 and 16.4c in FY13. Consensus estimates according to the FNArena database stand at 15c and 16.9c respectively.
With FY11 representing the fourth year of solid earnings in a row, management credibility is now high in RBS Australia's view. When combined with an attractive valuation, as RBS estimates Norfolk is trading on a FY12 earnings multiple of just 8.5 times, the broker suggests the stock is deserving of a Buy rating.
Moelis makes a similar argument, suggesting despite a share price increase of more than 50% over the past year the attractive earnings multiple and now proven attributes of Norfolk justify a Buy rating. The FNArena database shows two Buy ratings for Norfolk with an consensus price target of $1.58.
This consensus target implies share price upside of better than 21% from current levels. Moelis is not in the database but has a price target on Norfolk of $1.50. Shares in Norfolk today are higher and as at 10.30am the stock was up 4c at $1.34.
Over the past year Norfolk has traded in a range of $0.725 to $1.43.
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