Fleetwood A FY13 Growth Story

This story features FLEETWOOD LIMITED, and other companies. For more info SHARE ANALYSIS: FWD

– DJ Carmichael initiates on Fleetwood with Hold rating
– Searipple accommodation village offers some short-term concerns
– Longer-term outlook positive but stock viewed as fair value at current levels

By Chris Shaw

Fleetwood (FWD)) has for some time offered an attractive combination of exposure to the resources sector via manufactured accommodation for the resources, lifestyle and public sectors and earnings diversification from exposure to retirement spending through the manufacturing of recreational vehicles, caravans in particular.

Perth-based stockbroker DJ Carmichael has initiated coverage on Fleetwood ((FWD)) with a Hold rating,  as prior to this week's broad based share market sell-off, the share price was seen trading broadly in-line with the broker's $11.50 price target.

As DJ Carmichael notes, one recent point of concern with respect to Fleetwood was the Searipple accommodation village in Karratha in WA. At Searipple there is potential for excess supply of accommodation given expected delays by Woodside ((WPL)) with respect to a final investment decision on the Pluto 2 Expansion Project.

The market appears to have become more comfortable with the outlook for Searipple given a share price gain of 15% since mid June. The rally in the stock follows news Rio Tinto ((RIO)) was to take some of the rooms vacated by Woodside, but DJ Carmichael suggests it remains too early to turn more positive from an investment perspective.

The stockbroker is of the view there remains scope for the Karratha accommodation market to be softer than the market expects in FY12, especially given Woodside remains the major tenant at Searipple and the company is likely to conduct a full review of all development projects now that a new CEO is in command.

This is important for Fleetwood, as DJ Carmichael points out the company now generates around 75% of EBIT (earnings before interest and tax) from manufactured operations and 25% from recreational vehicles. By way of comparison, these splits were broadly the opposite back in FY05.

This means confirmation of additional accommodation contract wins is needed before DJ Carmichael could justify a more bullish shorter-term view. Taking a longer-term view, DJ Carmichael expects utilisation at Searipple will increase.

There is also potential for Fleetwood to win a major manufactured accommodation contract over the next year or so, such as for Chevron's Wheatstone project. This suggests strong earnings growth should resume from FY13, while in the meantime investors can enjoy a better than 6% fully-franked dividend yield.

The stockbroker's view remains the value is just not there for Fleetwood at present and this view seems broadly shared by other brokers to cover the stock, as the FNArena database shows Fleetwood is rated as Hold three times compared to two Buy ratings.

The Hold ratings are generally valuation based, Macquarie for example being attracted to the high dividend yield and solid earnings growth outlook, but unable to justify a higher rating at current share price levels.

The two Buy ratings in the database are courtesy of RBS Australia and UBS and reflect potential upside given respective share price targets of $14.80 and $13.50. Other targets range between $11.25 and $11.75, while the consensus price target in the database stands at $12.60. Investors should note both RBS and UBS haven't updated their view in recent times.

In terms of earnings expectations, DJ Carmichael is forecasting earnings per share (EPS) outcomes of 88.3c this year, 82c in FY12 and 96.7c in FY13, while consensus estimates according to the FNArena database stand at 88.8c for FY11 and 91.5c for FY12. Forecasts for FY13 range from 85.7c to 95.7c.

The current share price implies upside of around 10% to the consensus price target in the FNArena database.
 

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