Programmed Maintenance Stabilising

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The business of workforce provider Programmed Maintenance appears to be stabilising and brokers remain confident gearing levels will ease.

-Meaningful uplift required in second half to achieve guidance
-Strong free cash flow supporting the outlook
-Further cost savings and efficiencies expected
 

by Eva Brocklehurst

Programmed Maintenance ((PRG)) has highlighted a stabilising of its businesses with the integration of the Skilled Group acquisition almost complete. Debt levels remain the biggest issue but brokers are reasonably confident gearing is on the downward path.

The compnay's FY16 result revealed earnings of $43.4m were up 75% on a year ago. The result includes a full six months incorporating the Skilled merger. Marine revenue was down 80% and staff numbers 90% since the peak two years ago, but management believes this business is now stabilising at current activity levels and expects it to grow in FY18.

Management has retained FY17 operating earnings guidance of around $100m, which suggests to Ord Minnett a meaningful uplift is required in the second half. Still the broker is encouraged by the board's confidence in second half cash flows.

The company has suspended its dividend reinvestment plan and continues to guide to net debt being less than $200m by March 2017. A fully franked interim dividend of 3.5c was declared, down 46% on the prior corresponding half and representing a 50% pay-out of net profit after tax and amortisation.

The stock remains depressed and gearing is the biggest hurdle to a re-rating, in Ord Minnett's view. Despite a business that is relatively light on capital investment requirements, and an offshore oil & gas business which is at a trough in earnings, the stock trades on a forward price/earnings multiple of around 10 times, which the broker calculates is around a 40% discount to the Small Industrials index.

Flagging a strong track record in reducing capital intensity in the various divisions, Ord Minnett notes the company has already reduced debt from around 2.5 times earnings in FY09 to be almost net cash in 2015 and maintains an Accumulate recommendation.

The results go some way to easing Deutsche Bank's concerns following the downgrade in September and highlight the stabilising of the workforce business. Strong free cash flow indicates the risk/reward is favourable and underscores the broker's belief in the investment proposition.

The company has signalled there are opportunities although conditions remain challenging. Specifically, tenders under way in workforce and valued at $300m were noted, with an expectation that some will be won over the second half of FY17.

Deutsche Bank's FY17 earnings forecasts are unchanged and in line with guidance, while FY18 estimates are downgraded by 7% on weaker staffing earnings forecasts. The company expects staffing performance to improve over the second half with the completion of the integration of Skilled.

Macquarie highlights that the oil & gas business has now been folded into the operations & maintenance business, a move which will generate further cost savings. Moreover, the workforce business is now on a single system which should boost efficiency.

Margins improved because of the incorporation of the higher margin Skilled business and the consolidation of 20 branches. Macquarie notes a significant portion of the synergies in the half year came from this source. Margins in the property and infrastructure business were lower, as the downturn in mining capital expenditure continues to have an impact. The broker is happy that debt levels are reducing and considers the stock valuation undemanding.

UBS believes the company has, arguably, been in a state of transition for some years, ever since the merger with Integrated in 2007, but is confident earnings have troughed, which should translate into improving returns going forward.

There are four Buy ratings FNArena's database. The consensus target is $1.98, suggesting 13.5% upside to the last share price. Targets range from $1.80 (Ord Minnett) to $2.10 (Deutsche Bank). The dividend yield on FY17 and FY18 forecasts is 4.9% and 5.8% respectively.
 

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