Australia | Jun 25 2013
– Earnings outlook stable, if a bit soft near term
– FY14 improvements expected
– Dividend yield of 7% to increase
– Plenty of valuation upside potential
By Andrew Nelson
After more than a two-year hiatus, analysts at Deutsche Bank have picked up coverage on K&S Corporation ((KSC)) again, but with a much more positive message and a Buy call this time around. The broker joins Macquarie, at Outperform, as being one of only two of Australia’s major broking houses to cover the stock.
In an analyst note yesterday, Deutsche Bank resumed coverage that was dropped back in February 2010. Back then the broker had a Hold call on the stock, split between a positive view based on fairly stable operations and the heat still being felt from the GFC. That dynamic has well and truly played out and two years later the broker is still positive, but has now left the pains of the GFC well behind it.
Let’s start with a refresher. K&S is a transportation and logistics company, or to put it more simply, it is a trucking company specialising in road freight in both Australia and New Zealand. The company also does some warehousing, distribution and more specialised fuel distribution work, as well as freight forwarding and a number of other activities that fit in the transport and distribution space.
Back at the end of May the company announced FY13 net profit will likely be in line with FY12, but probably not better. At the time, only Macquarie was on the case and on the broker’s numbers the announcement pointed to an FY profit result of around. $16.4m. Macquarie was previously at $18.5m.
The broker cut its forecasts to bring them in line with the new guidance. FY13-15 EPS forecasts were lowered by 10.6%, 13.9% and 10.2%, which also pulled the price target lower. But given the shares had come off so much even at that point, the broker thought the bad news was already in the price. Add in the belief that a dividend lift was coming and the broker saw no reason to shift from Outperform.
Three weeks later we see Deutsche Bank picking up coverage, agreeing with Macquarie that the aggressive sell-off since the downgrade was simply too much. Sure, current conditions are difficult, but the business has always been a good cash generator and what’s better, much of that cash over the past year and a half has been put towards paying down debt. Gearing is now just 21%.
The broker thinks it won’t be too long before management is satisfied with the debt position and the drive to continue to repay debt will subside. What’s more, Deutsche Bank suspects we’re not far from that point. Once debt is comfortable, free cash flow will take off and the broker then expects to see the yield lift significantly in FY14 and then more in FY15. This will support a forecast dividend yield of over 7% out to FY15, believes Deutsche Bank.
The broker has also turned a little constructive on the backdrop, saying that with the cash rate likely to be trimmed further in the year ahead, there’s a good chance building, construction and manufacturing volumes could pick up in 2H14. Hence, higher volumes for K&S.
The broker hasn’t gone so far as to include this hoped for volume recovery into its forecasts, although it notes one thing is certain and that is transport volumes are always a leading economic indicator, thus K&S will reap the benefits well before the end markets it services.
On the broker’s numbers, the stock offers negative 10% or so EPS growth in FY14, but then 5% growth in FY15. On these earnings, the FY14 PE is 9.0x and FY15 is 8.6x and all on a dividend yield of 7%, which the broker thinks can only go up.
Macquarie’s numbers are much more favourable, the broker pencilling less than minus 1% EPS growth in FY14 and then 8.5% growth in FY15. PEs are 9.8x and 9.0x respectively on yields of 8.9% and 9.5%. What’s more, Macquarie thinks a hike in the dividend payout is still likely, thus the only thing missing is the minor levels of earnings growth it was previously expecting over the next 18 months.
Both brokers are within 10c of each other in terms of the price target. The FNArena database shows that the two brokers' averaged price targets offer more than 34% upside to yesterday’s close.
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