Programmed Maintenance Has The Skills

This story features MMA OFFSHORE LIMITED. For more info SHARE ANALYSIS: MRM

– Property & Infrastructure, Workforce strong
– Resources, Marine weak
– Merger synergies substantial
– Value undemanding
 

By Greg Peel

Programmed Maintenance offers maintenance, facility management and workforce services across the property and infrastructure and resources sectors. The company’s first half earnings result provides a snapshot of the current state of the Australian economy.

As investment and services spending in the mining and energy sectors continues to wind down, Programmed’s two divisions of Resources and Marine are struggling. Marine, which provides services for the offshore oil & gas industry, has been particularly hard hit. In this specific field, specialist peer MMA Offshore ((MRM)) is also finding its business rapidly declining as construction of the big Western Australian LNG projects reaches a conclusion.

On the flipside, property is leading the Australian economic transition and unemployment is falling. Infrastructure is quietly ramping up, with a promise of much more to come in over the next two years as state and federal governments pursue new construction. Programmed’s two divisions of Property & Infrastructure and Workforce are therefore performing well, to the point the group was able to net a 5.8% increase in profit over the previous first half.

As a standalone story, Programmed Maintenance would not be a stock offering a lot of net excitement in the foreseeable future, throughout the Australian economic transition. However the story becomes more interesting when we note that subsequent to the close of books on the first half, Programmed completed a merger with previous rival Skilled Group.

The bad news is that look-alike Skilled offers a similar balance, being big in maintenance and workforce but also bringing further exposure to offshore marine. The good news is there is substantial capacity for synergy gains within the merged entity. As to whether those synergies are enough to counter the ongoing struggle the company will face in Resources and Marine, at least in the near term, is the question brokers are asking.

Management admitted at the result release that the outlook for Marine is very weak. But it was noted that synergies are already tracking ahead of schedule for the group. Marine is nevertheless the sticking point for Credit Suisse. Until there is some earnings visibility in this sector the broker prefers to keep its powder dry on the investment front, and has downgraded its recommendation to Neutral from Outperform.

JP Morgan retains a Neutral rating, believing that gains from synergies will simply be offset by ongoing weakness in Marine.

Other brokers are, however, more upbeat about the value on offer.

Deutsche Bank sees a strong trajectory for Property & Infrastructure heading into FY17, offering sufficient growth to offset weakness in Resources. Marine’s tale of woe is of little surprise but the broker is encouraged by a pick-up in revenue in the first half for Workforce, which is a key positive.

Deutsche believes value is undemanding at the current price and maintains a Buy rating. UBS, similarly, believes that on a medium term basis the stock is cheap. UBS retains Buy.

Macquarie had been advising on the merger and thus had been on research restriction, but on completion is now back to reinstate an Outperform rating. The combination of Programmed and Skilled provides enhanced scale and diversification as well as significant synergies over time, the broker suggests, which will more than offset weakness in Marine.

The stock is trading at a 30% discount to the Small Industrials, Macquarie calculates, and thus value is undemanding.

All up the FNArena broker database is split between three Buy or equivalent ratings and three Hold. A consensus target price of $3.05 suggests 13% upside. On broker forecasts, the stock offers a 6.9% yield in FY16 and 7.3% in FY17.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms