Australia | Aug 04 2011
– Norfolk reiterate earnings guidance at AGM
– Update highlights the resilience of group earnings
– Moelis sees value, retains a Buy rating
By Chris Shaw
Norfolk Group ((NFK)) provides integrated electrical, communications, heating and air conditioning and fire protection services, management concentrating operations on the resources and government sectors. The focus is on building strong relationships with clients to assist in maintaining contracts.
The strategy appears to be paying off, as at the recent annual general meeting Norfolk management reiterated previous guidance for net profit after tax growth in FY12 of 10-15%. As Moelis notes, this comes off a relatively high base in FY11, where underlying earnings rose by 15%.
For Moelis the confirmation of previous guidance highlights how resilient earnings are for Norfolk. This reflects the fact the O'Donnell Griffin division, which comprises the electrical and communications businesses, has a strategic focus on counter-cyclical segments of the economy and operations where there is less competition for national contracts.
This is significant, as Moelis notes the O'Donnell Griffin division accounts for 85% of group earnings and in FY11 delivered solid increases in revenues and earnings before interest and tax (EBIT). Continued solid performance is expected, especially as the division has recently won two new contracts worth $56 million.
Not all the AGM news was as good, as Moelis points out the Haden division, which is the air conditioning installation and maintenance business, reported a 13% fall in revenues and an 82% fall in EBIT in FY11.
The Haden operations account for around 6% of group earnings and 30% of revenues and on the plus side Moelis points out internal initiatives are generating improved performance from this division that is expected to continue in coming months.
To reflect the AGM commentary from Norfolk, Moelis makes no major changes to earnings estimates going forward. In earnings per share (EPS) terms Moelis is forecasting outcomes of 14.5c in FY12 and 16.4c in FY13, while the FNArena database shows consensus EPS estimates of 15c and 16.9c respectively.
The forecasts from Moelis sit slightly ahead of management's guidance, the broker suggesting management is taking a conservative approach with respect to earnings in coming years. This reflects the potential for earnings in the O'Donnell Griffin division to be impacted by some larger contracts being delivered in FY13 rather than FY12.
The share price of Norfolk has been strong in recent months, Moelis noting the stock has gained 26% over the past year. This is solid outperformance relative to the Small Industrials index.
Despite the gains Moelis continues to see value, pointing out on its forecasts Norfolk is trading on a FY12 earnings multiple of less than nine times. This is viewed as undemanding, particularly given the resilience of earnings.
Given the value on offer Moelis rates Norfolk as a Buy, with a price target of $1.45. The FNArena database shows others agree there is value in the stock, as both RBS Australia and JP Morgan also rate Norfolk as a Buy. The consensus price target according to the database is $1.58.
Shares in Norfolk today are slightly higher and as at 10.40am the stock was up 1.5c at $1.26. This compares to a trading range over the past year of $0.94 to $1.43. The consensus price target according to the FNArena database implies upside of almost 27% from current levels.
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