Fleetwood On A Sustainable 7% Yield

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– Rio Tinto entry reduces risks surrounding Searipple accommodation village
– Fleetwood also looking to expand recreational vehicle production
– Earnings profile flat through FY12, yield attractive
– Stockbroker Moelis retains a Hold rating

By Chris Shaw

Managed accommodation has been an important part of Fleetwood's ((FWD)) earnings, so the negotiations with Woodside ((WPL)) over the Searipple contract were regarded as important. As expected, Woodside cut the number of rooms it required but as stockbroker Moelis notes, the additional rooms are quickly being taken up.

Fleetwood has signed a deal with Rio Tinto ((RIO)) that will see the resources giant take up 350 rooms. The other positive, notes Moelis, is the Rio Tinto deal was at market pricing of $180-$210 per room, as much as 30-50% ahead of what Woodside is estimated to have paid in its deal.

Elsewhere, demand for modular accommodation is expected to be challenging near-term. Moelis suggests Queensland recovery efforts post the floods earlier this year will present the best potential for near-term spending activity in this division.

Recreational vehicles are the other major part of the Fleetwood product offering and Moelis notes this division continues to enjoy a strong recovery. To take advantage of this, Fleetwood management is planning to increase production to around 54 vehicles per week early in FY12 and to around 70 per week by the end of FY12.

Moelis views the key to the expansion as Fleetwood's ability to maintain margins, as competition for blue collar labour is increasing given demand from the resources sector. As a partial offset to these pressures, Fleetwood has increased the level of automation in the manufacturing process in recent years.

On the news of Rio Tinto taking some rooms at Searipple, Moelis makes no changes to earnings estimates, earnings per share (EPS) forecasts standing at 90.1c this year, 91.2c in FY12 and 105.3c in FY13. This suggests a rather "flat" year ahead in terms of earnings per share growth, but a double digit jump in FY13.

Others in the market have reacted in a similar fashion, as having previously lowered estimates to account for Woodside reducing its rooms at Searipple, JP Morgan has restored its earnings forecasts on news of Rio Tinto stepping in as a replacement.

JP Morgan expects EPS for Fleetwood of 89.1c this year, 90c in FY12 and 95.7c in FY13. Consensus forecasts according to the FNArena database stand at 88.8c this year and 91.1c in FY12.

There is some upside potential to the estimates of Moelis as its numbers don't assume any major resource village contract wins despite a number of possibilities in both the iron ore and LNG sectors. The high Australian dollar will make securing additional contracts more difficult according to Moelis, as it makes offshore outsourcing more attractive.

With Rio Tinto taking some rooms market uncertainty surrounding Searipple has been reduced in Moelis's view. Even so, the earnings profile for FY12 implies modest growth, which is likely to limit the potential for share price outperformance.

Moelis rates Fleetwood as a Hold, while pointing out the strong balance sheet and solid free cash flow generation will support the dividend yield of around 7%. The rating of Moelis is broadly in-line with brokers in the FNArena database, which shows three Holds and two Buys. 

The consensus price target according to the database is $12.63, which is well above the Moelis target of $11.50. Targets range from Credit Suisse at $11.10 to RBS Australia at $14.80.

Shares in Fleetwood today are slightly lower as at 11.30am, trading down 2c at $10.70. Over the past year Fleetwood has traded in a range of $9.01 to $14.25, the current share price implying upside of around 18% to the consensus price target in the FNArena database.

 

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