Australia | Aug 02 2012
– Slowing in junior mining exploration impacting on Campbell Brothers
– Management offers cautious guidance for FY13
– Earnings forecasts and price targets mostly revised lower
– RBS suggests earnings guidance commentary is conservative
By Chris Shaw
At yesterday's annual general meeting for mineral testing service Campbell Brothers ((CPB)), management offered cautious outlook commentary reflecting the likely impact on the core ALS Minerals division from lower exploration activity among junior mining companies in particular.
As Deutsche Bank notes, junior miners at present account for around 50% of global exploration spend. The fact these companies are finding it difficult to raise capital for exploration activity is likely to see sample volumes and prices decline from what are currently peak levels.
This implies an earnings impact for Campbell Brothers, one JP Morgan suggests will come earlier than had previously been expected. The updated guidance from management for 1H13 net profit after tax of $130-$140 million supports this view, as JP Morgan's full year forecast for net profit of $261.8 million implies a flat second half. This compares to a forecast for interim net profit growth of around 30% relative to the previous corresponding period.
Factoring the updated outlook commentary into broker models sees reductions to earnings forecasts for Campbell Brothers. Changes to estimates in FY13 have been relatively modest, while cuts to FY14 numbers have been far more significant, with reductions of as much as 30% relative to previous numbers.
Consensus earnings per share (EPS) forecasts for Campbell Brothers according to the FNArena database now stand at 381c for FY13 and 372c for FY14. The revised forecasts have impacted on price targets, with the consensus target in the database falling to $52.53 from more than $60.00 previously.
Targets range from Deutsche Bank at $46.16 to RBS Australia at $69.76. RBS's target reflects the fact the broker has not adjusted earnings forecasts on the back of the updated guidance from management. In RBS's view the market has overreacted to the earnings commentary offered by Campbell Brothers, as it ignores the increased diversity of operations that now include markets such as Energy and Food/Pharmaceutical testing.
According to RBS, the outlook for a flattening in second half earnings applies specifically to Mineral Geochemical testing, which accounts for less than half of estimates earnings and has already been allowed for in the broker's model.
The implication is Campbell Brothers is being purposefully conservative with respect to outlook commentary. Adding weight to this view is the intention of management to invest a further $80 million in capital expenditure in FY13, which RBS suggests is a sign volumes are not expected to contract over the mid to longer-term.
This leads RBS Australia to suggest Campbell Brothers should still be able to growth revenue and earnings by around 20% in FY13, followed by further growth of around 10% in FY14. Earnings forecasts as a result are above consensus, RBS forecasting EPS of 393.3c in FY13 and 447.4c in FY14.
JP Morgan is less confident, suggesting along with the expected tougher conditions for the ALS Minerals division the outlook for the Life Sciences operations is also mixed. Negative sentiment towards mineral exploration-exposed stocks is likely to continue until global macroeconomic conditions stabilise, which in JP Morgan's view limits the potential for share price outperformance for Campbell Brothers.
This justifies an Underweight rating according to JP Morgan, while the FNArena database shows Campbell Brothers is rated as Buy once, Sell once and Hold five times. Morgan Stanley is not in the FNArena database but sides with RBS and rates Campbell Brothers as Overweight within an In-Line industry view.
For Morgan Stanley there is reason to remain positive, as Campbell Brothers continues to reshape its business towards less cyclical exposures, which is seen as cushioning any earnings decline to some degree. Credit Suisse points out that CPB has been enjoying a PE premium to the Australian mining services sector but that will likely now be challenged.
Morgan Stanley points out the latest update from management suggests a slowdown in earnings growth rather than a downturn in earnings for the minerals testing business. Given this, Morgan Stanley continues to forecast earnings growth in coming years with EPS forecasts of 406c in FY13 and 439c in FY14.
For Deutsche Bank, a Hold rating for Campbell Brothers is justified as while the stock is trading below global testing peers such a discount is justified given greater exposure to the cyclical minerals market and the risk of a pullback in minerals exploration spending.
Valuation also justifies a Hold rating for Deutsche as the broker's earnings forecasts imply a total shareholder return of 3.4% for the coming year. BA Merrill Lynch agrees a neutral view on Campbell Brothers is appropriate, as until earnings re-base it is hard to adopt a more positive stance on the stock despite valuation support at current levels.
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