Royal Wolf Delivers Amid East Coast Challenge

This story features AURIZON HOLDINGS LIMITED. For more info SHARE ANALYSIS: AZJ

-Challenge lies in portable segment
-Benefits from housing pick-up
-East coast recovery key to growth
 

By Eva Brocklehurst

Container provider Royal Wolf ((RWH)) delivered on expectations in the first half. Brokers were pleased the company is managing to stay ahead of the pack when it comes to extracting growth out of a challenging economy.

The first half result revealed revenue growth of 23%, although cost of goods sold rose 37%, largely attributed to a previously flagged low margin, large volume order from Aurizon ((AZJ)). This increased cost is expected to reverse in the second half. Sales in the higher margin portable storage segment declined, reflecting tough conditions in the retail, manufacturing and the government sectors. Credit Suisse observes that this decline could also be attributed to longstanding efforts to grow the rental channel.

The main challenge lies, according to Deutsche Bank, in this portable segment on the eastern seaboard, where structural changes are occurring in container sales. Royal Wolf is unsure at this stage whether this is solely a move from sales to leasing, or a symptom of underlying economic weakness. Despite this, Credit Suisse notes a structural shift to leasing from sales is supportive of ongoing margin expansion.

Still, there's no change to management's outlook and Macquarie notes the second half should benefit from higher utilisation rates, increased camp leasing and further sales of low security accommodation. The business should benefit from the pick-up housing activity while withstanding the slowdown in resources spending. All that being said, Macquarie thinks the stock is fully valued and retains a Neutral rating. Macquarie has questioned the company's pay-out policy previously, given the ongoing investment in the fleet. The interim dividend of 5c was unfranked and at the top end of the 40-60% pay-out ratio. The broker notes the company should be in a position to commence franking the dividend in FY15.

Moelis is confident that despite the challenges in current conditions the company can mobilise its market position, recurring income and diverse exposure. This justifies a multiple that's above the market and that broker retains a Buy rating with a $3.55 price target. New Zealand operations stood out, with revenue and earnings up 21% and 17% respectively. This reflected a benefit from currency movement as well as market share gain. Brokers observe this strong presence should continue, with the rebuilding of Christchurch continuing to create demand for the company's containers.

Deutsche Bank sums up with three comments from management, which signal a recovery, particularly on the east coast, is underway. These are, firstly, that freight industry activity has returned to normal seasonal peak demand, secondly, that lease agreements are for longer periods and, thirdly, that the utilisation rate for the lease fleet has improved. This supports the broker's positive view on the transport industry as a whole. Nevertheless, Deutsche Bank downgraded the stock after the subdued first quarter to Hold from Buy. At this stage, while acknowledging the signs of recovery are there, the broker is content to maintain that call, noting the stock is trading close to the price target of $3.25.

Credit Suisse was happy with the fact the second quarter showed a rebound on first quarter weakness. The broker lauds the fact that, while macro pressures are evident, the company has consistently performed and delivered on growth drivers, which enhance management credibility. It's a growth stock and the broker ticks the Outperform rating on the score card. Credit Suisse expects further margin expansion in the second half, amid a benefit from the delivery of six rental camps and strong leasing growth. Higher utilisation, supported by a recovery in freight markets, also points to higher second half profitability.

The margin fell short of JP Morgan's expectations but the broker acknowledges the positive momentum in the second quarter which should continue into the second half. The positives are the company's diversification, leading market position and scope for acquisitions in a fragmented market. Are there any negatives? Deutsche Bank lists a failure to integrate acquisitions as one possible downside catalyst. The stock's low liquidity and the 50% holding by General Finance Corp, which may be construed as an overhang, are also potential detractors.

Royal Wolf commands around 35% of the Australasian market. There are two Buy ratings and two Hold ratings on the FNArena database. The consensus price target of $3.31 suggests 5.8% upside to the last share price and compares with $3.43 ahead of the results. The price targets range from $3.10 to $3.55.

See also, Royal Wolf Supported By Diverse Market on December 9 2013.
 

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