Australia | Feb 08 2012
– Bradken result largely as expected
– Growth options remain in place
– Stockbrokers continue to rate Bradken a Buy
By Chris Shaw
Engineering services provider and rail equipment manufacturer Bradken ((BKN)) delivered a somewhat weak interim profit result this week, the result held back by ESCO-related market share losses and a protracted start-up of the new Norcast business. One area better than expected was the interest line, reflecting the debt restructuring achieved in 2011.
From a divisional perspective RBS Australia notes the core engineered products and mining consumables businesses were strong, making the result overall a reasonable one. Operating cash flows were the main point of weakness, largely due to a working capital build in the rail department.
A plus from the result was management reiterated full year earnings guidance of 35-40% net profit after tax growth. JP Morgan notes achieving this will require a higher second half skew than normal, though this appears achievable thanks to a combination of new markets, the roll-out of new products and capacity expansions. Significant one-off items are not expected in the full year result.
Post the result Deutsche Bank has retained a Buy rating on Bradken. In part this reflects the fact full year guidance was retained, while the broker is also more comfortable with the increase in working capital recorded during the period because the change reflected recent acquisitions.
While concerns about the achievability of earnings guidance remain in the market, Deutsche suggests these are overdone given improving global macro conditions. This suggests material upside potential from current levels.
Deutsche is not alone in this view, as the FNArena database shows Bradken scores a perfect seven-for-seven Buy ratings. Goldman Sachs is not in the database but also rates Bradken as a Buy given the valuation upside on offer.
As Goldman Sachs points out, the order book for Bradken is already sufficient to meet FY12 guidance. This leaves execution as the key and here the broker remains positive. Macquarie agrees, attracted to the quality of management in place and Bradken's strong market share in core products.
One positive noted by Macquarie is a recent move to China could deliver Bradken a strong medium-term cost advantage across all its businesses. The cost advantage in the rail business in China will be used as a springboard for other businesses, with management investing to achieve this.
Earnings growth going forward will also come from ongoing demand increases for Bradken's mining products, while Macquarie notes the recent Norcast and Overseas Alloys acquisitions will also boost revenues in the future.
While capex is high this year at around $160 million, gearing will only be high temporarily as Macquarie notes this capex has a 3-4 year payback period. BA Merrill Lynch suggests the end prize for Bradken will emerge from FY13, as the company develops into a global mining services provider with flexible production and global distribution.
Post the interim result brokers have made relatively modest adjustments to earnings estimates for Bradken. Consensus earnings per share (EPS) forecasts according to the FNArena database now stand at 70.9c this year and 82.9c in FY13. The changes in forecasts have seen price targets adjusted, the consensus target now $9.29 against $9.37 prior to the result.
Bradken offers a relatively attractive yield, expected to be around 5.4% this year and about 6.4% in FY13. Dividends are fully franked.
Shares in Bradken today are stronger and as at 2.50pm the stock was up 29c or 3.7% at $8.12. This implies upside of around 15%.
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