Australia | Aug 08 2012
– Bradken full year result meets guidance
– Brokers viewed the result favourably, lower gearing well received
– A lack of specific guidance limits changes to earnings estimates
– Buy ratings continue to dominate for the stock
By Chris Shaw
Bradken ((BKN)) had guided to full year earnings in a range of $95-$102 million and yesterday delivered on this guidance with a full year net profit of $100.6 million. Earnings from the Rail and Engineered Products divisions were better than expected, while interest charges were also lower.
A highlight of the result was an improvement in operating cash flows, as Goldman Sachs notes when combined with lower total capex spend this allowed gearing as measured by net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) to fall to 2.0 times against a forecast of 2.5 times.
The fall in gearing was well received by the market, RBS Australia noting this has allayed concerns Bradken may have needed to undertake a capital raising at some point.
For JP Morgan, the improvement in earnings for the Rail division shows management is making good progress in moving past problem contracts. At the same time, Bradken continues to leverage strong demand, which is being driven by higher mine production.
One offset in the view of BA Merrill Lynch is the weak macro environment, as this has the potential to weigh on demand in the Industrial and Rail divisions in particular. This resulted in management at Bradken offering conservative outlook commentary for the coming year, while avoiding any specific earnings guidance.
This lack of specific guidance has meant changes to broker earnings forecasts for Bradken have been relatively modest. With Bradken announcing the deferral of some new capex spending, Deutsche Bank has trimmed its EBITDA forecasts by 4% in FY13 and by 7% in FY14. This has been offset by lower depreciation and amortisation and interest expense assumptions, meaning little change to net profit after tax forecasts.
Moelis has been more positive and lifted earnings per share (EPS) forecasts by 5% through FY15, reflecting in part expectations of a solid uplift in margins in the Rail division. Goldman Sachs has gone the other way and trimmed EPS estimates by 4-9% through FY15, driven by cuts to expectations for the Rail and Mining divisions.
Consensus EPS forecasts for Bradken according to the FNArena database now stand at 73.2c for FY13 and 83.4c for FY14. Moelis and Goldman Sachs are not in the database, the former forecasting EPS for Bradken of 76.1c and 82c respectively and the latter 75.5c and 91c. Forecasts compare to EPS of around 60c achieved in FY12.
Changes to earnings forecasts generated changes in price targets, as the consensus price target for Bradken in the FNArena database now stands at $7.70, down from $7.96 previously. Targets range from Macquarie at $6.21 to JP Morgan at $8.62. Moelis has a target of $6.50, while Goldman Sachs's target is $6.30.
Aside from Macquarie, who has stuck with a Neutral rating, the other six brokers to cover Bradken in the FNArena database rate the stock a Buy. For JP Morgan this reflects a positive earnings outlook due to commodity demand remaining strong and Bradken's attractive exposure to this via a global manufacturing platform and good range of product lines.
As well, JP Morgan suggests the strong balance sheet of Bradken will allow management to pursue growth opportunities. BA-ML also sees upside, pointing out Bradken is now near the end of a significant investment program. This suggests returns should improve as higher margin mining products and new capacity comes on line.
Valuation is also supportive in BA-ML's view as with the stock trading on a FY13 earnings multiple of around 7.9 times at present, concerns such as the weak macro outlook and execution of future growth plans are already being discounted by the market.
Moelis agrees, suggesting a FY13 earnings multiple of less than eight times, which implies a discount of more than 35% to the ASX Small Industrials, is undemanding.
Investors in Bradken stand to benefit not only from a solid earnings growth outlook based on consensus EPS forecasts, but also an attractive dividend yield. Consensus dividend forecasts show an expected increase in payout from 41c in FY12 to 45c in FY13 and 51c in FY14, which suggests yields of 7.9% and 8.9% respectively. Dividends are expected to be fully franked.
Shares in Bradken today are higher in a stronger overall market and as at 1.25pm the stock was 10.5c higher at $5.845. This compares to a range over the past year of $4.62 to $8.68, the current share price implying upside of more than 32% relative to the consensus price target in the FNArena database.
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