- TPI result surprises
- Trend improving
- Recovery story beginning
- Not without risk

By Greg Peel

Once flying high with an $11 stock price, waste collector and recycler Transpacific Industries ((TPI)) found itself a significant victim of the 2007 global credit crunch as the market rushed out of over-leveraged companies and property/infrastructure funds. The GFC proper provided another slug, and a weak trading update last November sent the share price to its lows under 70c.

By contrast, Friday’s first half FY13 profit result announcement sent TPI shares rushing up 13%. The bottom line here is that while the result was no means a cracker, it was a lot better than that November update had suggested.

Lower interest expense meant TPI’s profit result came in well above consensus, albeit the earnings result was largely in line with broker expectations. The result represented a 4% drop from the first half FY12, but given the November update had suggested a 6% drop with a dour outlook from management, sending the share price down 25%, this slightly lower loss basically took the market by surprise.

TPI’s core Waste Management division showed an 8% drop in earnings for the period, driven by a mix of carbon tax, higher landfill levies, lower landfill volumes, with subdued construction activity having an impact, and subdued trading activity. While the nearer term outlook provides no real change to current conditions, the good news is that Waste Management’s performance improved in the second quarter from the first. The Commercial Vehicles division saw a 71% jump in earnings to offset the loss in Waste, and this is not likely to be repeated. The upside story is very much a Waste Management story.

WM is highly leveraged to a turnaround in Australian economy, particularly in construction. This is not going to happen overnight. In the meantime, TPI is undergoing a significant and very slow-moving restructure. Again, the benefits will not be an overnight story but having been beaten down so far, the company appears to now be on the road back, analysts suggest.

As noted, debt has since 2007 been the company’s stumbling block. UBS suggests the first half result “provides clear evidence of the strategic efforts to reduce the financial leverage of the business”. The reduction in interest expense is testament. At the result release management upgraded its cost savings guidance for the next three years from $30-40m to $50m which Credit Suisse sees as a “clear positive”. Throw in divestments and efficiency gains and the TPI story is looking rather encouraging.

Indeed, JP Morgan notes management appears reluctant to sell off the Commercial Vehicles division, which is understandable given the 71% earnings jump and offset to weak Waste in recent periods. But with management suggesting Vehicles has now hit “mid-cycle earnings”, hence no longer offering such earnings improvement, the timing is right for the business to be divested in JPM’s view.

Divestments aside, JP Morgan is sticking with Neutral for now given TPI’s margins are still trending down even as losses from Waste begin to ebb. The analysts would like to see a positive earnings result before becoming more confident. Credit Suisse (Neutral) is “tending towards a more positive bias” but would also like to see margins improve and believes the risk justifies the stock’s current valuation.

Macquarie has always maintained TPI boasts an attractive suite of assets and that the company has the potential to realise operational improvements and significantly reduce medium-term leverage. The modest improvement in the company’s second quarter is enough to draw an upgrade from the broker to Outperform.

Deutsche Bank sees a recovery story that is on track and offering upside and maintains its Buy rating, as does CIMB, who believes TPI’s growth story is “just starting”.

Post result, the six FNArena brokers covering TPI are split between four Buys (or equivalent) and two Holds. The consensus target price has jumped to $1.04 from 91c, suggesting a further 10% of upside despite Friday’s 13% re-rating.

After five years on the rubbish tip Transpacific’s long road back through significant restructure and deleveraging appears to have begun, although we’re only at the Chairman Mao stage, and analysts, while becoming more confident, are quick to warn there are still risks involved. Perhaps a sleeper for those with a bit of tolerance.

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By Greg Peel

At the bottom of the GFC, engineering and construction firm Monadelphous Group’s ((MND)) share price was under six dollars. This year the shares peaked over 25 dollars. And that’s just capital appreciation. Over the period Mona has not only paid a handsome yield but continually grown dividends to enhance a market-beating total return.

Mona’s interim dividend, following the company’s first half FY13 earnings result, fell just a little short of analyst expectations at 62c. What’s more, management has decided to initiate a dividend reinvestment plan (DRP) to assist in the funding of future dividends. What does this tell us?

DRPs, in which existing shareholders are offered a discount on new capital if dividends are reinvested rather than cashed, are by any other means a backdoor capital raising. DRPs are often employed by companies desperately attempting to raise more capital without wishing to telegraph too much desperation to the market, such as the banks in 2009. Mona’s case, on the other hand, is a very different one. As BA-Merrill Lynch suggests, it may be that even management sees the current MND share price as overvalued, meaning a DRP is a way of “cashing in”, or it may mean the cash generating power of the business – that which Merrills emphasises as a “hallmark of quality” – is likely to be weaker ahead.

Or maybe both are true. For a company which has built a solid-gold reputation for constantly growing dividends, any move to cut dividends in order to better navigate a period of earnings consolidation would have those yield-chasing investors, of which there are a vast number, rushing for the exits. No one would win. Whatever the case, Mona’s path from here is not quite as clear as it has been up to now, and management has been the first to admit it.

It is a truth now held to be self-evident that the Australian resource sector spending boom will shortly peak, both sooner than expected a couple of years back and at a lower level than previously assumed. The RBA has acknowledged this unfortunate reality several times in cutting its cash rate by 175 basis points over the past eighteen months. The big players BHP Billiton ((BHP)) and Rio Tinto ((RIO)) have been forced to rein in their most ambitious expansion plans and both CEOs have now exited, either through the front door or the trap door. Across the mining sector in general, cost-cutting is now the buzzword. The same is true for the LNG sector, albeit LNG capex is yet to peak.

The future has become a little cloudier. The global economy may be looking a little healthier in 2013 than it has done since 2008 but it’s been a long time coming, and rebound expectations have been both lengthened in timeframe and downgraded in pace. Mining companies are seeing to completion the longer term, big ticket projects they began a few years ago, but thereafter they will play a much more cautious game. LNG companies are yet to see their own mega-projects through to completion, so fingers are crossed.

Meanwhile, the resource sector capex boom up to this point has also meant a boom for the smarter of the suite of resource sector service companies whose offerings and wares represent a significant level of your average resource project cost. A couple of years ago, service companies could just sit back and wait for another anxious miner to bang on the door. Today, with a capex peak in sight, it is the service companies who are chasing the business. With contracts drying up and project pipelines becoming vague, the resource sector service industry has become a lot more competitive.

Monadelphous yesterday announced a first half profit of $79.1m, representing a 36% earnings increase on the first half of FY12. It was déjà vu for analysts who have become used to such performance, including last fiscal year in which earnings grew by over 30%. Revenue growth exceeded earnings growth in rising 47%. With many of Mona’s contracted projects heading towards completion, management has raised its FY13 revenue growth guidance to 35% from 25%.

The guidance upgrade has moved analysts to upgrade their own revenue forecasts, but the discrepancy in the first half numbers has not been overlooked. Revenues grew by 47% but earnings grew by only 36%. This means margins fell in the period. Operating cashflow fell 37%.

The fall in cashflow was largely a result of Mona spending up to support the last-push efforts of clients as projects near completion, and thus to support revenue growth. This drag on working capital will clearly subside after FY13. Margin compression, on the other hand, tells a different tale.

While not so long ago resource sector clients were indulgent spenders, today they are trying to keep costs to the minimum. Nor are clients so quick today to announce new project aspirations, and development/expansion plans are moving forward with caution. The pipeline of new contracts up for grabs for service providers is nowhere near as defined as it once was. Competition in the services sector has thus become a lot more pronounced. Margins are under pressure across the industry.

Analysts acknowledge that the big iron ore, coal and other mining contracts enjoyed by Mona and others will peak in FY13-14 as projects are completed and new contracts will diminish in number thereafter. On that basis, Mona has one last leg to cash in on what management described as the “extraordinary surge” in construction activity up to this point. Hence the FY13 revenue growth upgrade. FY14 will nevertheless be a different picture, to the point management has warned of “consolidation” ahead.

LNG development is set to continue before potentially reaching its own peak in FY14-15. The services industry players will all be chasing a reduced pipeline of opportunities after FY13, leading CIMB to suggest that while Mona will still achieve revenue growth in FY14, some new contract wins will need to be announced before the end of FY13 to ensure this. Those contracts are not likely to impact the bottom line until FY15, underlining management’s “consolidation” call for FY14, and moving Citi to suggest contract wins on the big Wheatstone and Ichthys LNG projects are “key” for Mona.

Mona saw a 47% increase in revenue growth from the first half of FY12 to the first half of FY13. Citi is predicting FY14 revenue growth of 4% and zero growth for FY15. Bear in mind Mona generates significant amounts of revenue and Citi is not forecasting this to abate. The broker is simply suggesting the astronomical growth run is over.

It’s hard to find any real divergence in views from the broker community. Testament to this is no less than six post-result recommendation downgrades from a pool of nine major brokers (seven FNArena database brokers covering MND along with Goldman Sachs and Morgan Stanley). Merrills, JP Morgan, UBS and Deutsche Bank have all downgraded to Sell (or equivalent) ratings from Hold while Macquarie, CIMB and Morgan Stanley have all downgraded to Hold (or equivalent) ratings from Buy. Citi and JP Morgan already had Sell ratings on the stock and Goldman has stuck to Hold.

Views are aligned, and perhaps best summed up by Mona’s own management which suggested yesterday that completion is now greater, margins are under pressure, uncertainty remains around new project approvals and the pipeline of opportunities is likely to reduce in the medium term. Analysts also whole-heartedly agree that Mona is a fabulous success story, driven by a solid team, for which an extraordinary period of growth opportunity is now reaching a plateau, for the time being.

Brokers might anecdotally agree, but when it comes to converting views to forecasts a very different tale emerges. Twelve month price targets for Mona range from JP Morgan (Underweight) at $19.00, or around 17% below today’s trading price, to CIMB (Neutral) at $28.28, or 24% above. If this is confusing for potential investors or current shareholders, perhaps a clue lies in the fact the high marker (CIMB) still felt it necessary to downgrade to Hold.

Differing target prices will reflect variance in earnings forecasts, and thus variance in what different analysts calculate to be Mona’s forward PE multiples. But to take two examples, Citi points out that its forecast FY13-14 PE of 15x is a big number for “a business that derives earnings largely from construction, which is typically lumpy with low visibility, with flat earnings growth in FY14-15”. Morgan Stanley calculates an FY14 PE of 14x, which the analysts cannot justify when compared to Mona’s peer Downer EDI ((DOW)) on an equivalent 9.3x.

Whichever way you look at it, now is not the time to buy into Mona. As to whether it is a time to sell out after a good run, that will depend on individual investment timeframes.

-Amcor results spark re-ratings
-Stock to some is now expensive
-Acquisition plans stand in good stead
-Benefits seen from restructuring
 

By Eva Brocklehurst

Packaging major Amcor ((AMC)) has been on the receiving end of a variety of responses to its half year result. There have been two downgrades and one upgrade on the FNArena database. JP Morgan has downgraded its recommendation to Sell from Hold, Citi has downgraded to Hold from Buy while Credit Suisse has upgraded to Buy from Sell. What's going on?

JP Morgan found contract wins, the company's acquisitions and the restructuring were all very positive but the broker considers the stock is now expensive on both an absolute and relative basis. This follows the significant share price appreciation over the last three months. Hence a Sell rating, the only one on the database.

In the Hold category, UBS has raised its forecasts but kept its rating as it sees little scope for outperformance. The profit result was 4% ahead of UBS estimates and underlying trends were generally positive in the broker's view. The broker is raising FY13-15 forecasts by 3-7% to reflect recent acquisitions, lower costs in the Australasia division, higher margins and a lower net interest bill. Citi liked the improvement in flexibles and return to double digit volume growth in Latin America but also sees the recent share price outperformance limiting a further rally. The broker admits a large degree of earnings certainty and multiple earnings growth drivers make the stock an attractive investment but, with a 16.4 times FY13 price/earnings ratio, valuation now adequately reflects the premium for both merger and acquisition and organic growth potential. A Buy rating is no longer justified.

Deutsche Bank on the other hand finds its Buy rating justified as the stock is trading at a 2% discount to the broker's revised valuation of $9.30. The broker sees full year earnings driven by resilient volumes, recent acquisitions, growth in emerging markets, cost reductions, and ongoing operational improvement. If there was one weak spot in the result, Deutsche Bank observed, it was the profit on asset sales of $40m, although the broker admits this has funded the Botany start-up costs of $23m and other restructuring costs, but the net benefit was just $5m.

Credit Suisse previously had a Sell rating, partly based on the Australian currency headwinds. The broker noted currency rates reduced net profit by $20m in the latest half. A one cent move in the AUD/EUR rate impacts profit by $5 million one way or the other while the sensitivity to the AUD/USD pair is up or down $3m annualised. The broker suggests the stock may now have a positive push from the euro's rally in the second half. Furthermore, CS likes the expanded margins in flexibles and rigid plastics. Moreover, the stock has the balance sheet capacity to go after the acquisitions it desires. The broker also finds the company a disciplined acquirer of businesses with $400-450m of acquisitions over the last 12 months at under six times enterprise value/earnings before synergies.

In the past, Macquarie believed this acquisition discipline made Amcor interesting. Acquisitions have been a key part of growth plans for some time, but a minimum 20% return on capital is required. After the results, the broker again highlighted this factor, noting Amcor has ten people in its M&A team on a global basis, tracking $2 billion or more in potential opportunities. The latest acquisition, tobacco packager Shorewood, showed such evidence of good synergy potential. Macquarie describes it as a logical bolt-on at a cheap price with 5.2 times trailing earnings multiples that are expected to reduce to 3.3 times post synergies. Macquarie doesn't mind the run up in the share price and believes the trading multiples are undemanding, given earnings growth of 7% is forecast for the second half and 10% growth is forecast for FY14.

Macquarie said Australasia (13% of earnings) has been a laggard for a number of years for the company but now has the potential to substantially increase earnings based on $70m of benefits from restructuring and closures. On the downside, the businesses exposed to domestic manufacturing are still challenged and part of this is structural. Petrie cartonboard mill was cash flow negative but this will be closed by December 13. The other negative is that there is still not much of a US recovery, with packaging distribution earnings down, although the broker admits this more reflects a lag in raw material recovery.

The net result of ratings changes leaves Amcor with four Buy (or equivalent) ratings in the FNArena database, three Holds and one Sell. The consensus target price has risen to $9.39 post-result from $8.43, offering less than one percent upside from yesterday's closing price.

See also Amcor Ticks All The Right Boxes on December 6 2012.
 

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-Bradken well positioned
-Some doubt as to recovery timing
-New products a major positive
-Chinese foundry to drive growth
 

By Eva Brocklehurst

Bradken's ((BKN)) latest results showed how the company is positioned for when the much-anticipated easing in mining capex happens this year. Half year revenue may have been flat, and the margin improvement smaller than expected, but the company has noticed a bottoming of the cycle, which is a welcome relief to brokers. Be that as it may, BA-Merrill Lynch believes it's too early to talk about a recovery and has taken a harsher line on the fabricator of freight wagons and mining consumables and equipment.

Exposure to producing mines and consumable products provides a high recurring revenue base and Bradken is expanding its reach by entering new regions and developing new products, especially in the Ground Engagement Tools (GET) segment, so this is considered the major positive.

Nevertheless, valuations are considered reasonably full. Looking at the FNArena database, Deutsche Bank's revised $7.10 target captures the improving outlook with a strong margin recovery assumed in near term estimates. Hence the broker has downgraded its recommendation to Hold from Buy. CIMB has ended up with the same target price after its re-valuation and has decided to stay with a Hold recommendation. JP Morgan's target is $7.94, at the top of the range on the database. This broker retains a Buy rating as the stock is trading at a 16% discount to the broker's $8.04 average valuation. BA-ML stands alone on the database with its Sell rating, reflecting its belief the stock is fully valued. The remaining brokers have Buy recommendations - Macquarie, Credit Suisse and UBS. In fact Macquarie and Credit Suisse upgraded their ratings to Buy (or equivalent) on the strength of the Bradken's interim report.

For mining products JP Morgan believes the de-stocking of consumables is ending and continued strength in mine production volumes is likely to support demand. This will offset lower capital sales as miners curtail their capex intentions. Moreover, the push into offshore markets should help diversify the business away from Australia's bulk commodities. CIMB sees Bradken's resilience in being a product supplier rather than a contractor. Moreover, the company has intellectual property rights in its products which stand it in good stead. Macquarie expects a continuation of sales growth and steady margin in the mining products and mineral processing divisions on account of the GET roll-out.

For mineral processing Deutsche Bank finds a healthy order backlog, with facilities expected to operate at full capacity in the second half. Strong gold and copper prices are encouraging high levels of production which, in turn, are supportive of demand for processing. JP Morgan highlights the integration of Norcast and investment in new facilities, which should provide opportunities to consolidate production into lower cost locations. 

Engineered products are suffering from weaker capex intentions but this is offset by easing capacity constraints, and the company is actually better able to meet demand. JP Morgan finds the company has good cost flexibility and, coupled with capacity expansion, expects this should support margins while allowing the company to chase new work. Here is where the downside risk to CIMB's FY13 forecasts lies. The broker notes order cancellations appear to have peaked but a material pick up in fourth quarter is required to achieve its forecasts. The order book stands at $250m, which provides strong coverage for Deutsche Bank's second half FY13 and first half FY14 revenue expectations.

Finally, rail wagon sector demand is seen as weaker in FY13 as miners and other customers curtail intentions. JP Morgan notes production volumes were holding up a base level of demand and, despite the lower price environment, the division should remain competitive going forward, albeit without a pick up in revenue growth in the near term. Macquarie expects steady sales growth and margin expansion in the rail division. BKN will complete fabrication of 700 wagons in the second half, slightly lower than the 934 fabricated in in the first half.

After being a bit cool on the stock after the AGM, Macquarie has made the strongest turnaround in expectations and upgraded its earnings forecasts - 12% and 24% for FY13 and FY14 respectively. The broker says this is due in large part to the inclusion of equity accounted profit associated with Bradken’s 20% stake in Austin Engineering ((ANG)). From an operational perspective, Macquarie's FY13 forecasts are relatively unchanged and FY14 up 8.6%. In contrast, BA-ML finds the contribution from Austin unsustainable, given the consensus outlook for Austin.

The completion and transition to the Chinese foundry in the second half is hailed by both Macquarie and Deutsche Bank as likely to drive improved earnings growth. Macquarie expects it could add material volumes and margin to the business - mostly crawler shoes - over the next 4-5 years, depending on a recovery in end markets.

The last word is from BA-ML: The broker is skeptical that a share price rally based on improving macro sentiment and metals prices will necessarily flow through to higher earnings/valuation over the medium term, citing a relentless focus on costs by the major resource companies. So, the broker continues to see earnings risk in FY13, with its estimates 7% below consensus.

See also Bradken Outlook Filed Down on October 25.
 

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