Australia | Jun 08 2011
– Bradken's recent capital raising has strengthens balance sheet
– Increased scope for bolt-on acquisitions
– Moelis sees value leading into an earnings growth acceleration post FY12
By Chris Shaw
At the end of last month Bradken ((BKN)) reiterated full year earnings guidance for a result in EBITDA (earnings before interest, tax, depreciation and amortisation) terms of $192-$200 million for FY11.
With guidance set, stockbroker Moelis suggests the key metric for any surprise in the result is cash flow. This is because management has indicated there is likely to be a spike in working capital in the second half attributable to an increase in rail sales with corresponding payments sliding into FY12.
Looking ahead, while management has indicated FY12 is likely to see a relatively flat result from the Mining Products division, Engineered Products should deliver growth of 20% in local currency terms. This sees Moelis forecasting earnings per share (EPS) of 60.4c in FY11 and 66.4c in FY12.
By way of comparison, consensus EPS forecasts according to the FNArena database stand at 61.2c and 64.5c for FY11 and FY12 respectively.
Moelis suggests there is some upside potential to these forecasts, as a recent share placement has left Bradken's gearing at only 28%. This will facilitate planned capex of $160 million in FY12, while also offering scope for bolt-on acquisitions.
On Moelis's numbers, Bradken has an estimated debt headroom of around $400 million that could be spent on acquisitions. While some acquisitions could be made in Australia, the stronger Australian dollar and a recovery in local demand is likely to see Bradken look to the US for possibilities.
There is some earnings uncertainty in FY12 from the ESCO licence expiry, but even allowing for this Moelis sees good value in the stock as earnings estimates imply an earnings multiple in FY12 of 12.1 times.
Growth in earnings is assumed to accelerate beyond FY12, adding weight to Moelis's Buy rating on Bradken. Others in the market are similarly positive, as the FNArena database shows four Buys and two Hold recommendations.
Another to rate Bradken as a Buy is BA Merrill Lynch, who post the recent placement was attracted to the fact the move gave the company greater financial flexibility with respect to acquisitions while also lowering financial risks given a strengthened balance sheet.
Credit Suisse downgraded to a Neutral rating from Outperform on the news, arguing if no acquisition is forthcoming the capital raising was an unnecessary dilution to earnings. Deutsche Bank similarly downgraded to a Neutral view, suggesting at share price levels post the capital raising the risk/reward for Bradken was simply not as favourable. (The share price has weakened since).
Moelis has a price target for Bradken of $9.50, while the consensus target according to the FNArena database stands at $9.25. Targets range from $8.60 to $10.00. Bradken's share price today is slightly lower and as at 11.45am the stock was down 8c at $7.93.
Over the past year Bradken has traded in a range of $6.71 to $9.60, the current share price implying upside of around 16% to the consensus price target in the FNArena database.
Extra: for those readers paying attention to FNArena's Icarus Signal, see chart below for another classic example of the usefullness of the signal.
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