- Incitec Pivot result viewed as better quality than that of Orica
 - Earnings forecasts for both stocks revised lower
 - Price targets also adjusted
 - Buy ratings continue to dominate on both stocks

By Chris Shaw

Both Orica ((ORI)) and Incitec Pivot ((IPL)) have exposure to mining and explosives as well as agricultural fertilisers and both companies reported full year earnings this week, allowing for some comparison as to how each company is travelling.

Orica's profit result of $650 million pre-significant items was slightly short of most market forecasts, with JP Morgan singling out the Mining Services division as the key disappointment. Operations at Minova in the US in particular also continue to struggle, while ammonium nitrate volumes also weakened in the second half of the year.

As well, JP Morgan notes the result was boosted by some low quality items such as a lower tax rate and a higher profit on asset sales. This means the quality of the result also disappointed, as when adjusting for these items the result fell about 5% short of the broker's estimate.

Looking into FY13, JP Morgan points out the capex outlook for Orica has deteriorated, as $200 million has to be spent at Kooragang Island to improve environmental safety and controls. This will generate an increase in net debt in coming years.

Ammonium nitrate volumes are also expected to fall in the coming year, which has contributed to cuts to broker earnings estimates. BA Merrill Lynch has lowered its earnings per share (EPS) forecasts by 6-7% for FY13 and FY14, while Citi has lowered its FY13 estimate by 4%. Consensus EPS forecasts for Orica according to the FNArena database now stand at 197.1c for FY13 and 215.2c for FY14.

Despite the cuts to earnings estimates, Macquarie still expects Orica to deliver 13% EPS growth in FY13. In the broker's view this makes the stock cheap given current earnings multiples of 12.5 times for FY13 and 11.4 times in FY14. This is a discount of 7-11% to market when compared to long-term average multiples for the stock.

Others in the market agree, as post the result Orica is rated as Buy six times and Hold twice, with a consensus price target of $27.78. This is down from $28.84 prior to the profit result. Targets range from Citi at $26.60 to Deutsche Bank at $30.00.

Brokers are similarly positive on Incitec Pivot, as post that company's profit result the FNArena database shows five Buy ratings and three Hold recommendations. 

Incitec Pivot delivered a net profit of $405 million, which was down 24% relative to the previous year. Such a decline had been anticipated and the result actually beat some forecasts, as for example Deutsche Bank had expected a profit of $386 million.

The result prompted JP Morgan to comment Incitec delivered a better quality result than Orica. A positive for JP Morgan was a write-back of Moranbah provisions, as this boosts earnings quality and transparency in the Dyno Asia Pacific business. 

The move also has the effect of generating some large downgrades to consensus forecasts for reported earnings in FY13, something JP Morgan suggests is likely to put some pressure on the share price in the shorter-term. Any such weakness should be viewed as an opportunity in the broker's view.

In terms of changes to earnings estimates, JP Morgan's normalised EPS forecasts have been cut by 5-7% for FY13 and FY14, while BA-ML has lowered its numbers by 9% and 5% respectively. Consensus EPS forecasts for Incitec Pivot according to the database are now 24.5c for FY13 and 28.1c for FY14.

The outlook for Incitec's North American explosives business is improving, while Credit Suisse expects ammonium nitrate volumes can grow at mid-to-high single digits in coming years. This supports solid medium-term earnings growth expectations.

As well, UBS expects capex for Incitec will decline in coming years, so delivering strong free cash flow generation. This will continue to support what is already a strong balance sheet in the view of BA-ML.

A consensus price target for Incitec Pivot of $3.37 suggests reasonable upside from current share price levels, price targets for the stock ranging from Citi at $3.05 to BA-ML at $3.60.

Shares in Incitec Pivot today are stronger in a higher overall market and as at 12.00pm the stock was up 11c at $3.13. This compares to a trading range over the past year of $2.62 to $3.62 and implies upside of around 10% relative to the consensus price target in the FNArena databsae. 

Orica offers around 17% upside to the consensus price target in the database and today is trading 5c lower at $23.80. Over the past 12 months Orica has traded between $23.01 and $28.27. 

 
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 - Leighton updates on earnings
 - Full year guidance reiterated, implies stronger final quarter
 - Brokers adjust earnings and targets
 - Market headwinds and gearing seen as issues
 

By Chris Shaw

For the nine months to the end of September, Leighton Holdings ((LEI)) reported net profit after tax of $317 million, the result including a one-off gain of $81 million from the sale of the Thiess Waste Management assets.

Along with the result, management reiterated full year underlying net profit guidance of $400-$450 million, which implies a stronger December quarter result of between $164-$214 million. UBS is not as confident given a slowing mining capex environment and trims earnings forecasts for the full year by 2.5% to $397 million.

While retaining its forecasts, BA Merrill Lynch also suggests there is downside risk to consensus earnings forecasts for Leighton given the December quarter can be more cyclical and current headwinds in the group's markets. 

These headwinds are an issue for RBS Australia as while FY12 earnings guidance is achievable the outlook for FY13 earnings has become more clouded. To reflect this RBS has lowered earnings estimates for FY13 by 8% from already below consensus levels, this to account for both some specific project risks and the potential downside risk stemming from Leighton's Middle East operations.

RBS is now forecasting earnings per share (EPS) for Leighton of 120.6c this year and 164.6c for FY13, while consensus EPS forecasts according to the FNArena database stand at 133.9c and 180c respectively.

The changes to earnings estimates made by RBS and others have impacted on price targets for Leighton, the database showing a consensus target of $18.16, down from $18.52 prior to the update. Targets range from RBS at $15.65 to BA-ML at $20.20.

In the view of RBS as consensus earnings forecasts for Leighton come down over the course of coming months, so too will the share price. As a result, RBS has downgraded its rating on Leighton to Sell from Hold.

This brings RBS in line with Macquarie, who suggests the valuation for Leighton is relatively full at present when the stock is compared to contracting peers. Also supporting Macquarie's Sell rating is ongoing concerns with respect to the balance sheet and $500-$600 million in related shareholder loans.

These concerns are overplayed in the view of BA-ML, who retains a Buy rating on Leighton. The broker notes work-in-hand has remained broadly in line with June 2012 levels, which implies the order book continues to be replenished. 

As well, further asset sales such as that of Thiess in the September quarter are expected, which BA-ML suggests will strengthen the group's balance sheet in coming months. UBS agrees, expecting gearing will fall from around 48% in net debt to net debt plus equity terms now to around 44% by the end of this year. 

BA-ML sees longer-term value at current levels given the potential for a turnaround in the share price if assumed margin expansion is achieved in FY13. Citi also sees scope for some margin improvement as more higher margin oil and gas worked is ramped up in coming months.

UBS is more cautious though, retaining a Neutral rating given the stock is trading near its unchanged price target of $18.00. Overall, the FNArena database shows Leighton is rated as Buy only by BA-ML, compared to five Hold ratings and two Sell recommendations.

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 - NRW Holdings reiterates FY13 revenue guidance
 - Softer second half performance is implied
 - Competitive environment pressuring margins
 - Yield underpins value

By Chris Shaw

An update from engineering and contracting group NRW Holdings ((NWH)) included reiteration of revenue growth for FY13 of 15%, which implies a softer second half given first half revenues are expected to be around $800 million.

As Citi notes, the softer second half reflects the loss of revenues from Fortescue's ((FMG)) Solomon project and BHP Billiton's ((BHP)) Inner Harbour project. For the full year NRW Holdings now has $1.3 billion of revenues secured by contracts, which means $263 million in work must still be one to meet guidance.

This is most likely to come from the Civil or Drill & Blast divisions, where work continues to grow strongly. In contrast, Deutsche Bank suggests the Mining division is likely to be down slightly in year-on-year terms.

To reflect the more competitive conditions Deutsche has trimmed earnings estimates, this given the factoring in of more conservative operating margins. Forecasts for FY13 have been cut 5% and in FY14 by 15%, while Citi in contrast makes only minor changes to its model.

Consensus earnings per share (EPS) forecasts for NRW Holdings according to the FNArena database stand at 39.2c for FY13 and 40.3c for FY14. The changes have impacted on Deutsche's price target, which falls to $2.75 from $3.50. This is more in line with Citi's unchanged target of $2.65, while the consensus target in the FNArena database stands at $3.34, with more broker revisions likely ahead.

With further contract wins needed to ensure revenues meet expectations for the year, Deutsche suggests this could be achieved via acquisition. A strong balance sheet makes such acquisitions possible and Deutsche estimates $800 million of new debt-funded work would be accretive to FY14 earnings by around 7%.

Post the update from NRW Holdings, Citi notes its earnings forecasts for FY14 are around 10% below consensus. Even given this, the broker suggests NRW Holdings appears cheap, as the earnings multiple for FY14 would be just over 5.0 times.

Investors are also paid well for holding the stock, as Citi's forecasts imply a full franked dividend yield of more than 10% for FY13 through FY15. Deutsche's dividend forecasts are slightly higher and imply a yield of just over 11% in FY14.

Both Citi and Deutsche continue to rate NRW Holdings as Buy, while overall the database shows the stock is rated as Buy five times and Hold twice. RBS Australia downgraded NRW Holdings to a Hold rating last month given less confidence in FY14 expectations, which now appears justified given the latest update.

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 - Amcor AGM commentary as expected
 - Results in minor changes to earnings estimates
 - Defensive earnings and solid yield seen as attractive
 - Buy rating still the majority among brokers

By Chris Shaw

Annual general meeting commentary from packaging manufacturer Amcor ((AMC)) contained no surprises, the company indicating earnings are tracking in line with expectations outlined with full year results in August. This is despite still difficult end market conditions.

The update implies Amcor will achieve organic growth for FY13 of around 5% in Australian dollar terms according to Macquarie, this despite the challenges for the Australian operations posed by a strong currency and rising costs. This has resulted in slightly softer than expected volumes, which Amcor will attempt to counter by an increased focus on operating costs.

Offsetting the difficulties in Australia has been a strong start to the year for the flexibles operations, which account for 50% of Amcor's total sales. In Macquarie's view this highlights the defensive qualities of Amcor's businesses.

A highlight for Deutsche Bank was management's indication free cash flow will continue to improve. This cash flow will be directed to organic growth opportunities and acquisitions, particularly those that expand the company's footprint in emerging markets and that add new technologies.

If no suitable acquisitions can be identified there is potential for excess cash to be returned to shareholders by way of higher dividends and/or share buybacks in the view of Deutsche.

On the back of the commentary from management brokers have made minor changes to earnings estimates, largely to account for changes to foreign exchange assumptions. Consensus earnings per share (EPS) forecasts for Amcor according to the FNArena database now stand at 54.6c for FY13 and 62.6c for FY14.

Changes to forecasts have prompted some changes to price targets, the largest adjustment coming from JP Morgan who lifts its target for Amcor to $8.25 from $7.60. The consensus price target according to the database has risen to $8.11 from $8.02, which implies upside of around 4% relative to the current share price.

This lack of share price upside relative to targets suggests the stock is not particularly cheap, Macquarie noting Amcor at present is trading on a market multiple of around 14 times FY13 earnings. But when a 5% dividend yield (partially franked) is added total shareholder return rises to around 10%, which Macquarie suggests is attractive given the reliable nature of Amcor's earnings. 

This is enough for Macquarie to rate Amcor as Outperform. A majority agree, as the FNArena database shows Amcor is rated as Buy four times, Hold three times and Sell once. JP Morgan is among the Hold ratings, noting while the reiteration of previous guidance is a positive given recent downgrades to 1H13 expectations in the market, the stock appears reasonably valued at current levels on a sector-relative basis.

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By Eva Brocklehurst

Brokers peered through the gloom in Bradken's ((BKN)) Annual General Meeting outlook and decided to trim earnings estimates. The fabricator of freight wagons, mining consumables and heavy equipment parts told shareholders it was just not certain how the new year would pan out. However, the company was seeing a softening in demand. That was enough for most brokers to ratchet down forecasts for earnings growth. Maybe FY13 will be a no-growth year as BA-Merrill Lynch contends. Nevertheless, the consensus of broker recommendations on the FNArena database shows, irrespective of earnings downgrades, they're still keen to own the stock. There are five Buys and two Holds. Consensus earnings growth forecasts are 11.6% in FY13 and 10.5% in FY14.

UBS has trimmed its earnings forecasts in the wake of the AGM and its price target is $7.75 from $8.50. However, the broker kept its Buy recommendation, suggesting the decline in the company's share price  - by 30% year to date - is unjustified. UBS expects FY13 earnings to slip by 2% year on year and believes the limitations to its outlook are more than absorbed by the current share price (last close $4.83). BA-ML thinks BKN will find growth only in the mining products business in FY13 and expects earnings to be similar to FY12, with a starting base at $225 million. While acknowledging downside risks if the cycle deteriorates further, the broker still expects growth to occur and sees the stock as a Buy. Nevertheless, the price target was lowered to $6.20 from $7.10. A second wave of the resources boom would allow BKN to benefit from significant growth opportunities within Australia, BA-ML contends. This would, of course, be helped by recovery in global economies combined with the group's expanding offshore footprint. BA-ML's earnings forecasts for FY13 and FY14 were lowered by 13% and 12% respectively.

Goldman Sachs was not that confident about the mining consumables and downgraded its rating to Hold from Buy. Caution was urged, anticipating a period of de-stocking associated with a deterioration in demand for mining consumables and mining-related capital equipment components. The broker notes the stock price has not performed that well over the last year and sheets this home to the cyclical downturn in bulk resources markets, and the downgrade to FY12 guidance given in April 2012 (rail contract write-downs). De-stocking for mining related capital products (around 30% of FY12 sales) is expected to commence in the second half of FY13 and be driven by reduced mining expenditure. Lower manufacturing rates by the likes of the global equipment manufacturers, such as Caterpillar, won't help BKN either, Goldman notes. Caterpillar is a key customer of BKN's engineered products - the castings and frames used in heavy equipment manufacturing. Nevertheless, Goldman views this de-stocking period as temporary. FY13/FY14 earnings forecasts were revised down 10/13% and the 12-month price target lowered to $5.55 (was $6.30). RBS also downgraded its recommendation to Hold from Buy and cited an overnight update from Caterpillar, which cut its 2012 guidance and pointed to slower production. RBS expects this theme to play out across the sector in coming weeks. The broker has reduced its expectations for engineered products too - 27% of BKN's revenue - expecting a slight earnings decline in that division. RBS' revised FY13 earnings forecast is for little or no growth and it has revised the target price to $5.35 (the lowest in the FNArena database) from $7.80.

Reduced orders and industry de-stocking makes Macquarie cool on the stock but it maintains a Hold recommendation. This broker has focused on commodity prices and escalating capital costs, which it says  are placing pressure on miners to reduce both operating and capital spending in an attempt to conserve cashflow. Macquarie had already downgraded FY13 and FY14 earnings by 9% and 20%, respectively. The broker admits that BKN is a well managed company with strong market share in its core products but softening demand from core customers, a large coal exposure and significant operating and financial leverage are holding sway at present.

On the more positive side, JP Morgan sees production volumes holding up and expects this should bolster underlying demand. The broker doesn't find the lack of guidance for FY13 surprising, given the issues facing the Australian resources sector. JP Morgan is staying a buyer on BKN with an $8.14 price target, expecting activity to stay reasonable in the  in gold, copper, oil and natural gas sectors. Another positive for Bradken is the ramp up of the Xuzhou foundry and it will also benefit from unwinding of one-off losses in the Rail division from FY12. Moreover, JP Morgan believes industrialisation of the developing world economies combined with BKN's global manufacturing platform, product lines and R&D capability should stand the company in good stead. 

Despite the relative gloom, Bradken's consensus target price in the FNArena database is $6.70, suggesting 39% upside from Wednesday's close. A range of $5.35 to $8.14 nevertheless highlights an uncertain outlook.
 

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