- ALS delivers solid interim result
 - Slowdown in minerals exploration the main threat to earnings
 - Brokers adjust forecasts and price targets
 - Sell ratings continue to dominate

By Chris Shaw

ALS ((ALQ)), the former Campbell Brothers, delivered interim results on Friday and the result of $135.5 million in net profit after tax was at the mid-point of previous earnings guidance offered at the AGM in July.

The composition of the result was a little different to what Citi had expected, as while sales were a little below what had been forecast this was offset by better EBIT (earnings before interest and tax) margins at the group level.

The result was accompanied by updated full year earnings guidance, management indicating net profit after tax for FY13 should be in a range of $235-$255 million. The mid-point of this guidance is slightly below Citi's previous forecast of $249 million.

To reflect this the broker has made minor changes to its numbers, lowering FY13 earnings per share (EPS) estimates by 2% and forecasts for FY14 and beyond by around 4%. Others in the market have reacted similarly, JP Morgan cutting its EPS numbers by 5% this year and by 10% in FY14, while the likes of Deutsche Bank and Credit Suisse have increased FY13 forecasts slightly.

The major concerns stemming from the interim result in Deutsche's view are signs of slowing organic revenue in most divisions and the impact of a deteriorating minerals exploration market, as this is the key driver of earnings for ALS.

This trend may take some time to reverse, as from a peak in FY13 Goldman Sachs expects two years of earnings decline in FY14 and FY15 despite management at ALS indicating a recovery in the geochemical market in late 2013 is likely.

A positive identified by Morgan Stanley is that while the Minerals division remains the primary earnings driver for ALS, defensive revenues in other parts of the business have shown signs of growth. This has the capacity to mitigate some of the slowdown in the Minerals business in Morgan Stanley's view.

Citi also points out the combination of a strong balance sheet and strong cash flows means ALS is likely to look for acquisitions to continue delivering earnings growth. The interim result was an example, as while organic growth in 1H13 was around 15% relative to the previous corresponding period, growth from acquisitions was 12%.

Macquarie agrees, pointing out ALS remains focused on building a globally integrated food and pharmaceutical business and is willing to achieve this by acquisition assuming targets meet the financial requirements of management. As well, Macquarie notes the upstream oil and gas testing and inspection sector is attractive for ALS, though multiples in this sector are currently higher than in the food and pharmaceutical sectors. 

The issue for Macquarie is valuation, as on the broker's numbers the stock is trading at an 11% premium to the market at present. For Macquarie this appears full given a declining earnings profile over the next 12 months and ongoing risk around earnings given the weakening outlook for global exploration.

This is enough for Macquarie to retain a Sell (Underperform) rating, which is the majority view of brokers in the FNArena database. The database shows ALS is rated as Buy twice, Hold twice and Sell four times. Goldman Sachs is not in the database and also rates ALS as Sell.

The consensus price target for ALS according to the FNArena database is $9.65, down from $9.86 prior to the interim result.

For Credit Suisse the earnings headwinds in place appear enough to limit the potential for any share price outperformance, while Deutsche sees the stock as fair value at current levels.

Morgan Stanley in contrast continues to rate ALS as Overweight within an In-Line industry view, seeing enough potential from acquisitions acting as an offset to a slowdown in the Minerals business and from growth in more defensive revenues as enough to justify maintaining a Buy rating on the stock.

Citi agrees, seeing value in relative terms as while the broker suggests ALS should trade at a discount to global peers given a higher commodity exposure, this discount is currently well above historical levels and so appears excessive.

Shares in ALS today are higher in a stronger overall market and as at 11.20am the stock was up 10c at $8.79. This compares to a range over the past year of $7.23 to $10.29, the current share price implying upside of around 10% relative to the consensus price target in the FNArena database. 

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 - Lower occupancies and margin pressure weighing on Fleetwood's earnings
 - Credit Suisse cuts its forecasts, suggests consensus estimates are too high
 - Broker reiterates its Underperform rating on the stock

By Chris Shaw

The FNArena database shows Fleetwood Corporation ((FWD)) is rated as Buy twice, Hold twice and Sell (Underperform) once, with a consensus price target of $11.01. One of the outliers in price target terms is Credit Suisse, which has cut its target to $9.60 from $12.08.

The reduction in price target reflects Credit Suisse's view expectation earnings for Fleetwood in FY13 will be impacted by lower occupancy rates at the Searipple facility and lower margins in the manufactured accommodation business. 

According to Credit Suisse, 1H13 accommodation earnings are likely to be less than half what was achieved in 1H12, as occupancy rates at Searipple have fallen to 40-50% from around 90% at the same time last year. This means negative operating leverage for Fleetwood.

While some improvement is expected in 2H13 Credit Suisse notes there remains oversupply in the Karratha region, which offers scope for room rates to be pushed lower. As well, the broker points out profits in the manufactured accommodation business are being impacted by lower levels of high margin work in the resource sector. 

The Recreational Vehicle division should be able to generate some cost savings by the transfer of some manufacturing to Western Australia, but Credit Suisse points out this will likely be offset by weak consumer demand.

To reflect this view of Fleetwood's markets, Credit Suisse has cut its earnings per share (EPS) forecasts by 28% in FY13 and by 13% in FY14 to 66c and 95.4c respectively. These revised estimates compare to consensus forecasts according to the FNArena database of 75.2c and 95.0c respectively.

The difference underpins the argument of Credit Suisse that the market is not pricing in enough of an impact from lower occupancy rates and margin pressures. With downside risk to consensus earnings forecasts, Credit Suisse maintains an Underperform rating.

This view differs from the likes of Macquarie, who viewed share price weakness related to a soft first quarter trading update as a buying opportunity in the stock given the expectation of a relatively rapid recovery in earnings in the second half of FY13 and into FY14.

JP Morgan and CIMB Securities sided more with Credit Suisse last month in suggesting there was scope for cuts to consensus estimates in coming months, both brokers downgrading ratings from Buy to Hold.

The counter argument of UBS is the stock offers value at current levels assuming existing earnings expectations are met, especially given share price weakness following the August profit result.

In a stronger overall market shares in Fleetwood today are slightly higher, trading up 1c at $9.71 as a t 11.40am. Over the past year the stock has traded in a range of $9.31 to $13.46, the current share price implying upside of around 14% to the consensus target in the FNArena database.

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 - AGM commentary from Monadelphous positive
 - Earnings guidance better than expected
 - FY13 result to be strong despite growing margin pressures
 - Peak in construction cycle seen as major threat to earnings

By Chris Shaw

Expectations for solid revenue and earnings growth for resource sector service provider  Monadelphous ((MND)) for FY13 were already in place, but AGM commentary from the company yesterday still managed to surprise to the upside.

Guidance for the full year is for revenues to increase by 25%, driven by a 40% increase in the first half. This was well above the forecasts Macquarie's for 17% full year growth and 25% growth in the first half, the broker noting the better than expected guidance reflects a surge in construction activity as a large number of projects have ramped up in recent months.

The only negative in the update for Macquarie was some signs of margin pressure emerging, this as customers focus increasingly on lowering costs and tightening capex spending. Improved productivity at Monadelphous should act as an offset, so Macquarie is forecasting flattish margins for FY13.

Given increases to revenue forecasts, Macquarie has lifted earnings forecasts for Monadelphous in earnings per share (EPS) terms by almost 8% in FY13 and by nearly 9% in FY14. Others in the market have followed suit, with Goldman Sachs lifting its numbers by 5% and 3% respectively and JP Morgan by 8% and 0.3% in FY13 and FY14.

Consensus EPS forecasts for Monadelphous according to the FNArena database now stand at 170.5c for FY13 and 180.1c for FY14. Changes to earnings estimates have generated changes to price targets, the consensus target for the stock increasing modestly to $22.93 from $22.88. Targets range from JP Morgan at $18.05 to CIMB Securities (formerly RBS) at $27.86.

While currently above consensus with its forecasts for FY13, the issue for Morgan Stanley with respect to Monadelphous is as to whether the first half of FY13 proves to be the peak in growth for the company. The trend towards customers looking to lower costs is only likely to intensify in the broker's view, which has implications given in the longer-term Monadelphous's business is likely to become increasingly skewed to lower margin maintenance work. JP Morgan has similar concerns.

For Morgan Stanley this implies there is better value elsewhere in the sector, with Downer EDI ((DOW)) preferred given a more attractive earnings multiple and a market leading position in the electrical engineering market. Morgan Stanley rates Monadelphous as Equal-weight within an Attractive industry view.

BA Merrill Lynch offers a similar view with its analysis, noting while performance at present is good, Monadelphous will at some point find the going tougher when the level of construction activity peaks. BA-ML expects an earnings peak fairly soon, which means no change in Neutral rating.

JP Morgan continues with its Underweight rating on Monadelphous, as despite management's strong track record of earnings growth and a good reputation as a contractor the 16% premium to valuation at present suggests near-term earnings risks are not being factored in at present.

JP Morgan also sees better value elsewhere in the sector, with Downer, Lend Lease ((LLC)) and NRW Holdings ((NWH)) all offering more attractive combinations of earnings growth and gearing in the broker's view.

Not all agree, as both Macquarie and CIMB Securities have maintained Outperform ratings on Monadelphous. For Macquarie the combination of a strong earnings growth profile, a good track record of project delivery, a solid balance sheet and a fully franked yield of better than 6.0% continue to justify an earnings multiple premium to peers.

As well, Macquarie points out the current multiple for Monadelphous is a discount to the market and the stock's historical average, which implies value. CIMB agrees, arguing the market is too bearish on the earnings outlook for the next 18 months. Delivery of earnings should deliver share price outperformance in the broker's view.

Overall, the FNArena database shows Monadelphous is rated as Outperform twice, Hold four times and Sell once. Goldman Sachs rates the stock as Neutral.

In a weaker overall market shares in Monadelphous today are higher and as at 1.45pm the stock was up 43c at $21.94. This compares to a range over the past year of $18.81 to $24.37, the current share price implying upside of around 6% relative to the consensus price target in the FNArena database.

 
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 - Boart Longyear cuts earnings guidance again
 - Management credibility and earnings outlook in question
 - Brokers cut forecasts and price targets
 - Downgrades in ratings follow changes to models

By Chris Shaw

An inability to lower costs to meet weaker end-market demand and weaker margins forced Boart Longyear ((BLY)) to reduce 2012 earnings guidance yesterday. While management reiterated full year revenues would be around US$2.0 billion, EBITDA (earnings before interest, tax, depreciation and amortisation) guidance is now for a result of US$310-$320 million, down from a previous range of US$360-$390 million.

As Macquarie notes, this is the second downgrade to earnings guidance from Boart Longyear in the past three months, which brings into question the credibility of management. This implies some questions with respect to guidance for 2013, where management have indicated EBITDA should be above the 2H12 run rate of around US$107 million.

Macquarie's view is the magnitude of headcount reductions, other restructuring initiatives and capex cuts across the mining sector suggest a weaker 2013 outlook than Boart's management is currently indicating. Supporting this view is the expectation pricing cuts for Boart's services should also offset some of the cost cutting initiatives being introduced.

Credit Suisse is also cautious on the outlook for 2013, this as Boart Longyear at present is only 20-30% of the way through contract negotiations for the period. Currently the broker is forecasting a 15% decline in global explorations pending next year, with 7% falls in prices for drilling services and 1% for drilling products.

In the view of JP Morgan the indication from Boart Longyear management that demand will stabilise in 2013 is premature, as to date there has been no meaningful recovery in equity raising activity by junior miners and large miners remain committed to reducing capex spending. As well, Credit Suisse is modelling around US$55 million in cost cuts for Boart Longyear, which is below the $70 million target of management. 

With management having lowered earnings guidance brokers have adjusted their models, with changes to earnings estimates generating reductions in price targets. The FNArena database shows a consensus target for Board Longyear now of $1.62, down from $2.23 previously. Targets range from BA-Merrill Lynch at $1.40 to Deutsche Bank at $1.97.

Given lower earnings expectations and concerns with respect to earnings in 2013, brokers have also adjusted ratings for Boart Longyear. Citi, Macquarie and CIMB Securities (formerly RBS) have downgraded the stock, Citi to Hold from Buy and the latter two brokers to Underperform from Neutral. The database shows Boart Longyear is now rated as Buy twice, Hold three times and Sell three times. Moelis is not in the database but rates Boart Longyear as Hold.

Management's credibility coming under question and the uncertainty of earnings in 2013 are a strong enough combination for Macquarie to rate Boart Longyear as a Sell, while BA Merrill Lynch comes to the same conclusion when adding in issues such as an unattractive valuation and a somewhat irrational industry structure.

JP Morgan retains a Neutral rating given the risk to 2013 earnings expectations, while UBS argues there is little scope for share price outperformance given a combination of volume declines and pricing pressures as mining companies look to lower capex. 

Both Deutsche Bank and Credit Suisse have maintained Buy ratings on Boart Longyear, the former as the current earnings multiple and dividend yield appear attractive and the latter as the current share price appears to be pricing in too bearish an outlook for the company.

Shares in Boart Longyear today are lower in a stronger overall market and as at 1.05pm the stock was down 8.5c at $1.315. Over the past year the stock has traded in a range of $1.092 to $4.41, the current share price implying upside of more than 20% relative to the consensus price target in the FNArena database.

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