Australia | Oct 25 2012
By Eva Brocklehurst
Brokers peered through the gloom in Bradken's ((BKN)) Annual General Meeting outlook and decided to trim earnings estimates. The fabricator of freight wagons, mining consumables and heavy equipment parts told shareholders it was just not certain how the new year would pan out. However, the company was seeing a softening in demand. That was enough for most brokers to ratchet down forecasts for earnings growth. Maybe FY13 will be a no-growth year as BA-Merrill Lynch contends. Nevertheless, the consensus of broker recommendations on the FNArena database shows, irrespective of earnings downgrades, they're still keen to own the stock. There are five Buys and two Holds. Consensus earnings growth forecasts are 11.6% in FY13 and 10.5% in FY14.
UBS has trimmed its earnings forecasts in the wake of the AGM and its price target is $7.75 from $8.50. However, the broker kept its Buy recommendation, suggesting the decline in the company's share price – by 30% year to date – is unjustified. UBS expects FY13 earnings to slip by 2% year on year and believes the limitations to its outlook are more than absorbed by the current share price (last close $4.83). BA-ML thinks BKN will find growth only in the mining products business in FY13 and expects earnings to be similar to FY12, with a starting base at $225 million. While acknowledging downside risks if the cycle deteriorates further, the broker still expects growth to occur and sees the stock as a Buy. Nevertheless, the price target was lowered to $6.20 from $7.10. A second wave of the resources boom would allow BKN to benefit from significant growth opportunities within Australia, BA-ML contends. This would, of course, be helped by recovery in global economies combined with the group's expanding offshore footprint. BA-ML's earnings forecasts for FY13 and FY14 were lowered by 13% and 12% respectively.
Goldman Sachs was not that confident about the mining consumables and downgraded its rating to Hold from Buy. Caution was urged, anticipating a period of de-stocking associated with a deterioration in demand for mining consumables and mining-related capital equipment components. The broker notes the stock price has not performed that well over the last year and sheets this home to the cyclical downturn in bulk resources markets, and the downgrade to FY12 guidance given in April 2012 (rail contract write-downs). De-stocking for mining related capital products (around 30% of FY12 sales) is expected to commence in the second half of FY13 and be driven by reduced mining expenditure. Lower manufacturing rates by the likes of the global equipment manufacturers, such as Caterpillar, won't help BKN either, Goldman notes. Caterpillar is a key customer of BKN's engineered products – the castings and frames used in heavy equipment manufacturing. Nevertheless, Goldman views this de-stocking period as temporary. FY13/FY14 earnings forecasts were revised down 10/13% and the 12-month price target lowered to $5.55 (was $6.30). RBS also downgraded its recommendation to Hold from Buy and cited an overnight update from Caterpillar, which cut its 2012 guidance and pointed to slower production. RBS expects this theme to play out across the sector in coming weeks. The broker has reduced its expectations for engineered products too – 27% of BKN's revenue – expecting a slight earnings decline in that division. RBS' revised FY13 earnings forecast is for little or no growth and it has revised the target price to $5.35 (the lowest in the FNArena database) from $7.80.
Reduced orders and industry de-stocking makes Macquarie cool on the stock but it maintains a Hold recommendation. This broker has focused on commodity prices and escalating capital costs, which it says are placing pressure on miners to reduce both operating and capital spending in an attempt to conserve cashflow. Macquarie had already downgraded FY13 and FY14 earnings by 9% and 20%, respectively. The broker admits that BKN is a well managed company with strong market share in its core products but softening demand from core customers, a large coal exposure and significant operating and financial leverage are holding sway at present.
On the more positive side, JP Morgan sees production volumes holding up and expects this should bolster underlying demand. The broker doesn't find the lack of guidance for FY13 surprising, given the issues facing the Australian resources sector. JP Morgan is staying a buyer on BKN with an $8.14 price target, expecting activity to stay reasonable in the in gold, copper, oil and natural gas sectors. Another positive for Bradken is the ramp up of the Xuzhou foundry and it will also benefit from unwinding of one-off losses in the Rail division from FY12. Moreover, JP Morgan believes industrialisation of the developing world economies combined with BKN's global manufacturing platform, product lines and R&D capability should stand the company in good stead.
Despite the relative gloom, Bradken's consensus target price in the FNArena database is $6.70, suggesting 39% upside from Wednesday's close. A range of $5.35 to $8.14 nevertheless highlights an uncertain outlook.
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