Australia | Apr 24 2013
– Market leading container position
– Broker sentiment positive
– Moelis sees further upside available
By Andrew Nelson
Royal Wolf ((RWH)) is a stock that has begun to garner increasing attention since listing in 2011. The company is a provider of portable container solutions in Australia and New Zealand, as well as providing bespoke international work. Container sales and leasing is the core business, with the company possessing the largest lease fleet in Australia.
Since listing on the ASX in May 2011, the company has been able to post steady revenue and earnings growth during a period of difficult economic conditions and slowing resources growth.
The stock boasts a positive read on the FNArena Sentiment indicator, with the FNArena Database showing two Buys and one Hold. Macquarie is the broker at Hold, having downgraded from Buy at the beginning of February. The broker thought the interim result was fairly solid, although largely in line with expectations. The problem for the broker at the time was that the share price was already pretty close to the analysts' revised price target.
Earnings estimates were lifted slightly, but there was also room for criticism. Macquarie analysts wondered, given an unfranked dividend, is it really necessary to maintain a 50% payout ratio at a time of increased investment in the fleet? That being said, Macquarie said it continues to like the company's potential on a medium-term horizon.
Credit Suisse, at Buy, likes Royal Wolf for its management quality, visibility and growing demand for its product base. The first half was strong, said CS back in February, and performance at that time was quite supportive of the broker's FY13 estimates.
Lastly, Deutsche Bank initiated coverage on Royal Wolf with a Buy call and $3.10 price target the same week. The broker thought the company was in a really good position to benefit from an Australian housing recovery given 20% of revenues are generated by the construction industry. Given the broker's forecasts for Royal Wolf are lower than other shares with Australian housing recovery exposure, the broker sees plenty of relative upside when the cycle does turn.
That takes us up to this week, when analysts at Moelis Australia initiated coverage with a Buy call of their own and a target price of $3.35. The broker’s target sits well above the $2.98 consensus target in the FNArena database.
Moelis likes the company’s diverse revenue base and operating footprint, noting RWH is not overly exposed to any single industry, but still well leveraged to any sort of broad-based economic recovery. The strategic market position is also attractive, the broker citing the fact that Royal Wolf is the largest supplier of container leases in Australia.
Importantly the company’s earnings are not overly exposed to any single industry or economic thematic, leaving plenty of scope for cyclical recovery upside.
The broker notes that in the past, sales were the primary focus. But in recent years, management has made some substantial progress in the container leasing business. This not only adds to the revenue base, but also improves earnings visibility given the typical leasing contact extends to 14 months. Yet the real point of difference is product innovation, Moelis citing a broad range of products that consistently help increase the viable usage of container units and thus demand.
It’s not the cheapest stock and there isn’t a lot of spare space on the balance sheet. Gearing is at 40% and this may well limit nearer-term opportunities for further bolt-on acquisitions. In fact, Royal Wolf currently trades at a 10% premium to domestic peers on FY14 earnings. Although, Moelis thinks the premium is appropriate given the company’s dominant market position.
Further complicating the valuation picture is the track record of strong performance delivered over the past year. Over the past twelve months, shares have outperformed the ASX200 index by 44%. Yet at a target price of $3.35, which is well above consensus, the company is still only trading on an FY14 PER of 15.0x. Reasonably priced, said Moelis, who suggests there is still upside available.
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