Tag Archives: Other Industrials

article 3 months old

Fleetwood Poised For The Turn

By Michael Gable 

A few disappointments came through last week, resulting in the US being sold off the most since June. Disappointing earnings for US companies and further disagreements at the EU summit were to blame. Our market however took it in its stride, and although we are up at these stretched levels, it managed to avoid going into panic mode for the time being. The Dow appears to want to reach a new high in the short term before commencing any meaningful correction. When it does correct, we will most likely see it initially move more than the 200 points that it dropped the other night.

Last week I was looking at the [ASX 200] to rally up and find resistance at 4580. It has now done that within a few points and pulled back. I also thought that that would lead to a pullback to 4350. Yesterday’s decline on the market was fairly soft so the market is still buying dips and hasn’t gone into panic mode. We may therefore congest up for another few days before deciding which way to head next.

If you are still looking for yield but happy to grab hold of something that is a bit more cyclical and undervalued, then Fleetwood ((FWD)) is now at the right levels for the medium – longer term investor to consider purchasing.

Fleetwood

 
After peaking over $14 last year, we can see that FWD has pulled back in 3 waves and formed a double bottom here under $10. I last wrote about FWD on 2 October where I suggested that although it looked good in the short term, it should find support closer to $9. Last week’s low of $9.31 saw a lot of buying come in on very high volume (circled). This suggests exhaustion on the downside and with momentum picking up also, we should have a good low in place here. With a 7.5% fully franked dividend and a consensus target of $11.50, any dip under $10 is a buying opportunity. Strong resistance is up at $11.50. Traders need to ensure they place a stop under last week’s low.
 

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
 
Visit Michael Gable's website at  www.michaelgable.com.au/.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management.

Michael deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

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article 3 months old

Oz Engineering And Contractor Preferences Updated

 - Engineering and contractors expectations updated
 - Market conditions turning more difficult as projects are delayed/cancelled
 - Earnings impact likely, forecasts revised
 

By Chris Shaw

JP Morgan's 10th Australian Civil Contractors Survey indicated companies in the sector are experiencing an increase in order book and margin pressures. This means a greater numbers of large contractors expect profit margins and order books to shrink rather than grow when compared to six months ago.

This is the result of recent reductions in the capex plans of major resource companies such as BHP Billiton ((BHP)) and Fortescue Metals ((FMG)). To reflect this, earnings forecasts for capex related segments such as construction and equipment hire have been lowered.

JP Morgan continues to expect engineering construction spending in the Heavy Industry sector will grow in FY13, this given the size of major projects already under construction. Activity is then expected to plateau around FY13 levels over the medium-term.

Long-term JP Morgan suggests the outlook remains one of support for commodity prices and therefore production output increases, but shorter-term the weak global economy is creating a less favourable operating environment.

The only sector still upbeat is the Australian energy sector, this given the large number of LNG projects in Queensland, Western Australia and the Northern Territory that are too far advanced to stop. This is especially the case given the costs associated with delayed deliveries.

In terms of the construction cycle clock, JP Morgan's view is the oil and gas sector remains near the top, while the resources sector has moved quickly into a downturn and the economic infrastructure sector is presently between stabilisation and recovery.

JP Morgan also has a Contractors' Expectations Index (CEI), which is a diffusion index offering a snapshot of survey results over time and an overview of expectations for Australian contractors. The index uses metrics including profit margins, forward order books, labour and material costs, overheads and workforce size.

The CEI now stands at 29.3, down 30% from six months ago. A reading of 50 or more indicates improving expectations, while readings below 50 indicate declining expectations for the coming 12 months.

As JP Morgan notes, the latest CEI result shows large contractors have turned pessimistic about the outlook for the first time in three years, while smaller contractors remain pessimistic as the issues impacting on larger contractors continue to filter down. 

Factoring in its updated view and the latest survey results, JP Morgan has lowered earnings estimates and price targets. Preferred exposure for JP Morgan remains production leveraged contractors, as miners are at least maintaining production levels across most commodity sectors as demand holds up. As well, JP Morgan notes production leveraged contractors have stronger links to output than prices, which implies less earnings pressure over the next year or two.

Ratings are unchanged, with Overweight ratings ascribed to Ausdrill ((ASL)), Bradken ((BKN)), Downer EDI ((DOW)), Lend Lease ((LLC)), NRW Holdings ((NWH)) and Seven Group Holdings ((SVW)). JP Morgan rates LeightonHoldings ((LEI)), Transfield ((TSE)), Boart Longyear ((BLY)) and United Group ((UGL)) as Neutral, while Monadelphous Group ((MND)) and ALS ((ALQ)) are rated as Underweight. Goldman Sachs also rates ALS as Sell, having downgraded from a Neutral rating following recent share price gains.

In the view of Goldman Sachs, FY13 is likely to be the peak year for earnings for ALS, which suggests limited upside over the next 12 months relative to the current share price. Total potential return for the stock is now below zero on the numbers of Goldman Sachs, which supports the downgrade in rating.

Citi notes attendees at the recent Minexpo, which is held every four years, offered a cautious view on the outlook for mining capex. This fits with the broker's own view, reflecting more defensive demand in the gold and copper sectors and weaker demand putting coal and iron ore projects at more risk.

To date Citi notes there are no signs of any pricing erosion, though the broker continues to suggest pricing pressure in a slower growth environment is the main downside risk to earnings for mining equipment providers.

From a longer-term perspective, Citi suggests positive fundamentals remain in place, this reflecting the fact mines continue to go deeper, become more automated and deal with issues such as greater water scarcity. 

Following a number of company meetings and industry conferences, BA Merrill Lynch has taken an incremental negative view of the Engineering and Contracting (E&C) and mining services sector of the market.

Along with a cyclical downturn in the global mining sector, BA-ML notes cost escalation in Australia is putting capex under threat as resource companies are attempting to rein in costs. This implies downside risk to consensus earnings estimates across the sector.

Goldman Sachs formed a similarly cautious view after a number of company visits, as the tone of most meetings reflected a lower level of confidence than previously encountered. In part this is explained by the recent fall in iron ore prices and the flow on impact of this drop on expansion activity. 

One positive in the view of Goldman Sachs was a number of companies were able to present strategies targeting growth in other commodities or geographies as an offset to the decline in iron ore expansion activity. Australian LNG and international gold and copper projects are now a key focus for the sector. 

The other positive was many companies are currently either carrying net cash or carrying low gearing levels, which is a positive given the softening outlook. This also leaves room for further merger and acquisition activity in the sector, Goldman Sachs noting the main interest appears to be in obtaining technology or market leadership in complementary sectors rather than simply acquiring more scale.

Looking ahead, with construction activity likely to fall in coming years, companies are looking at boosting recurring operations and maintenance revenues. This sector of the market is expected to become very competitive, which Goldman Sachs suggests will put pricing and margins under pressure.

Among those for which earnings risk is highest in the view of BA-ML are Bradken and Emeco Holdings ((EHL)), the former as a weaker outlook for capital goods sales is likely to impact on the order book and the latter as backlogs slow and new order lead time shrinks for heavy mining equipment.

In general, BA-ML remains cautious on stocks with significant end-market risk, operating leverage and weak balance sheets. In the current market this implies those stocks most at risk from an earnings sense are those companies operating in coal and iron ore markets. These include Emeco, Sedgman ((SDM)), NRW Holdings and Mastermyne Group ((MYE)). 

Among those companies for which earnings are most protected thanks to higher levels of global earnings diversification according to BA-ML are Ausenco ((AAX)), Imdex ((IMD)) and Bradken. BA-ML's preferred pick in the sector remains Bradken on a valuation basis, while least preferred for BA-ML are Imdex and Ausdrill.

Among stocks covered by Macquarie, the broker rates WorleyParsons ((WOR)), Monadelphous, Downer EDI, Orica ((ORI)) and Incitec Pivot ((IPL)) as Outperform, while Boart Longyear ((BLY)) and Transfield ((TSE)) are rated as Neutral. Underperform ratings are ascribed to ALS, UGL ((UGL)) and Leighton Holdings.

The ratings reflect Macquarie's preference for oil and gas exposures and exposure to production and operating expenditure over capex. Of stocks covered, WorleyParsons has the highest oil and gas exposure at 68% of revenues, followed by Transfield at 30% and Monadelphous at 15-20%.

Largest exposures to opex are the explosives businesses of Orica and Incitec Pivot at 90-95%, followed by Transfield at 80-90% and Downer EDI at just under 70%. At the other end of the scale Leighton and Monadelphous have the largest capex exposure at around 67% of revenues.


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article 3 months old

United We Stand

By Michael Gable 

[Note: the following is an excerpt only. For the full report see details below. Ed.]

The beaten up media stocks are having their time in the sun here. Much is being made of the rumours of Seven West Media ((SWM)) going private, but the real volume is in APN News & Media ((APN)) and ten Network ((TEN)). They look like the better trades in my opinion. Today I have also updated my thoughts on some blue chips – QBE Insurance ((QBE)), Cochlear ((COH)), and Woodside Petroleum ((WPL)). One great buying opportunity here is United Group ((UGL)). It is a fairly safe utility that has very good upside potential. Finally, I have looked at how the price of oil is trading from a longer term perspective. Have a look at my attached article from The Australian this morning. Once oil breaks out of this consolidation, it has the potential to rally up to US$40.



I am seeing similar accumulation in the UGL as I did with APN. After dropping heavily after its annual report in August, we have seen a lot of volume go through UGL at these lower levels with a notable increase in momentum. If UGL had further to fall, the volume would be very low as it eases up here. But strong volume at a two and a half year low suggests that large holders are accumulating the stock. UGL pays a decent 5.6% fully franked dividend, and being a utility, you would expect it to hold up well if the market undergoes a correction. When UGL breaks out of this base, we could see it trade a dollar higher quite quickly, with traders eventually looking for the gap to be filled just under $13. 


Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
 
Visit Michael Gable's website at  www.michaelgable.com.au/.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management.

Michael deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

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article 3 months old

Fleetwood Not Unhitched

By Eva Brocklehurst

Mining village, transportable accommodation and caravan builder Fleetwood ((FWD)) is considered a quality stock but suffering from depressed occupancy in one of its villages. With a large proportion of recurring revenue and a 7% fully franked yield, RBS Australia believes FWD offers more defensive exposure than its engineering and construction peers but has tagged the company with a Hold rating until it sees an improvement in occupancy rates. The broker has concerns about the Searipple accommodation that FWD built for Rio Tinto ((RIO)) and Woodside ((WPL))  in Karratha, Western Australia. RBS suspects the current low occupancy levels will not turn around soon and Fleetwood will have to lower room rates.

Moreover, RBS expects a loss in the caravan building division. This will occur because the company is relocating its caravan and camper manufacturer, Windsor Caravans, to Western Australia where they will be built at the Coromal Caravans site. The transfer to a combined manufacturing facility provides an opportunity to improve production efficiencies and the designs of both brands but in the short term will be a cost for the balance sheet.

Consensus forecasts for earnings per share from the FNarena database show 89.2c for FY13 and 101.2c for FY14. Changes to RBS' forecasts sees FY13 earnings per share fall to 74c from 98c (24%) . These changes mainly relate to occupancy levels at Searipple coupled with expected lower room rates,  the relocation of Windsor to the west coast plus an increase to the payout ratio assumption to 103% from 83% of retained earnings. The latter shows the broker considers the weakness in the outlook for the stock to be short term in nature. Its higher dividend assumption is based on the fact that FWD has increased its dividends over the last 15 consecutive halves and is anticipating strong growth down the track from Osprey (WA) and Gladstone (QLD) villages. RBS believes these factors support a one-off increase in FWD's payout ratio.

RBS anticipates FWD's FY13 earnings will be heavily weighted to the second half of FY13 as the first half will be weighed down by Windsor relocation costs and margin compression. However, over the medium term, it is forecasting earnings will be underpinned by long-term contracts when Osprey and Gladstone villages come on line. The broker notes its profit forecasts are about 20% below consensus for FY13. Other brokers have a mixed outlook for the stock with Macquarie's last view showing an Outperform and others, albeit showing earlier views, ranging from Underperform to Buy.

FWD's Coromal facility has the capacity to manufacture 60 caravans per week. Currently, it manufactures around 25 per week.While the transfer of Windsor to WA will result in some one-off costs these should be offset in the second half by overhead savings, according to RBS. Consequently, over a full year, relocation of Windsor to WA will have a neutral impact on FY13, the broker said. Looking at this division in FY14 RBS believes the centralising of its manufacturing facility should add an additional $4.5m-5m to earnings. However, it cautions, this needs to be put into context. The division's contribution to FWD's earnings is around just 5%.

RBS values FWD on a blended valuation (Discounted Cash Flow/Price Earnings ratio). Hence the broker's target price falls to $11.42 (from $13.66) based on equal weighting of DCF and target PE of 11.9 times FY13 forecast earnings. Key upside risks to the target price include large contract wins, new facilities coming on line, accommodation shortages developing in Western Australia and Queensland, construction recovery and even increased confidence in retiree domestic travel. On the downside, the main risks are project delays/cancellations, labour shortages, a slowdown in mineral exploration, high petrol prices and increasing unemployment. 

RBS now provides the only Hold rating on Fleetwood in the FNArena database, leaving three Buys and a Sell from Credit Suisse after a good share price run. FY13 consensus forecast earnings show an expectation of a 1.4% fall but this is followed by 13.5% growth in FY14. Forecast yields for FY13-14 are 7.7% and 8.5% respectively. A consensus target price of $12.82 suggests 25% upside at current pricing.


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article 3 months old

Icarus Signal New Entries: WorleyParsons And NRW Holdings

Update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

WorleyParsons ((WOR)) has landed on Icarus' radar with the share price finding the going tougher this week. To followers of FNArena's Icarus Signal this hardly comes as a surprise as most stockbrokers with a positive bias towards the stock have set a price target around current level. Those with a less buoyant outlook have targets at lower levels.

It is easy to forget that, amidst all the market noise around, but WorleyParsons is a member of the pick and shovel services providers in the Australian share market; engineers and contractors servicing tomorrow's output in iron ore, coal and base metals and, in WorleyParsons' case, emerging supply in oil and gas. Observe the share price is actually HIGHER than it was back in January and about 10% off the mini-Bubble peak reached in March this year (when literally everyone and his dog wanted a piece of this sector).

Are there any conclusions to draw from the WorleyParsons experience?

I think so. One is not all services providers are the same. WorleyParsons does not have that same (extreme) leverage built-in as, for example, Emeco ((EHL)) and Boart Longyear ((BLY)). Secondly, investors do manage to distinguish the higher quality names from the weaker colleagues in this as in other sectors of the share market. History suggests, and recent price action confirms, WorleyParsons is among the higher quality names. As is Monadelphous ((MND)).

Observe that Monadelphous' share price is unchanged (on a net basis) since the start of 2012, so WorleyParsons has outperformed. One quick look at Stock Analysis (see elders on this website) immediately reveals why: better growth prospects. If current market consensus turns out correct, WorleyParsons should continue churning out financial performance updates showing double digit profit growth. Expectations have risen in the weeks past, for Monadelphous market expectations have dimmed slightly. Monadelphous is much more exposed to iron ore and coal.

Conclusion number three: Mr Market is not so negative about those contractors that will be servicing the ballooning LNG industry in Australia. Apart from WorleyParsons, see, for example, the share price of Mermaid Marine ((MRM)).

Meanwhile, it cannot be left unmentioned that some stocks in this sector are still seeing investors leaving in droves. Observe, for example, how the share price of Fleetwood ((FWD)) is falling off a cliff these past few weeks. The other obvious example is NRW Holdings ((NWH)); quality company with quality management servicing quality customers. Right now, however, investors prefer to be safe rather than sorry. Can anyone imagine the shares trading as high as $4.40 earlier this year? Well, they're below $2.20 now and that is no less than 62% below consensus target.

The result is stocks such as Fleetwood and NRW Holdings seem to be offering ridiculous dividend yields (9-10%) and ever so lower multiples. Bargains for the brave? Mr Market, volatile as ever, doesn't always get it right but sometimes these excessive sell-offs do precede another bad news cockroach creeping from under the refrigerator. So treat with the appropriate risk assessment.

There are now 38 stocks trading in the vicinity of their target and this list, unsurprisingly, contains many solid dividend payer, including Sydney Airport ((SYD)), Transurban ((TCL)) and National Australia Bank ((NAB)).

No less than 78 stocks are trading above target, and this group includes the likes of Woolworths ((WOW)), Thorn Group ((TGA)), Spark Infrastructure ((SKI)), Tatts ((TTS)) and Westpac ((WBC)). Newcomers are CSL ((CSL)), Domino's Pizza ((DMP)), DUET Group ((DUE)) and Navitas ((NVT)).

There is the odd miner or exploration company in both groups, but most are still to be found in the Bottom 50 where stocks including Buru Energy ((BRU)), Resource Generation ((RES)) and Panoramic Resources ((PAN)) are waiting for the right sparkle to fly higher. Better be careful, though, as these apparant bargains deserve to be treated with the right risk assessment too.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 WOR $ 27.75 $ 27.83 0.29%
2 HIL $ 1.15 $ 1.155 0.43%
3 CSR $ 1.58 $ 1.589 0.57%
4 WHG $ 0.95 $ 0.957 0.74%
5 CPA $ 1.04 $ 1.056 1.54%
6 CMW $ 0.77 $ 0.783 1.69%
7 IGR $ 0.56 $ 0.57 1.79%
8 MTS $ 3.65 $ 3.725 2.05%
9 RKN $ 2.28 $ 2.335 2.41%
10 CTD $ 2.72 $ 2.79 2.57%
11 GWA $ 1.82 $ 1.868 2.64%
12 AUB $ 7.93 $ 8.143 2.69%
13 MGR $ 1.41 $ 1.449 2.77%
14 RDF $ 2.04 $ 2.10 2.94%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 DMP $ 10.26 $ 10.24 - 0.19%
2 CSL $ 45.18 $ 44.43 - 1.66%
3 DUE $ 2.08 $ 2.045 - 1.68%
4 NVT $ 4.20 $ 4.12 - 1.90%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 PPX $ 0.06 $ 0.107 75.41%
2 NFE $ 0.80 $ 1.30 62.50%

To see the full Icarus Signal, please go to this link

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Treasure Chest: Downgrade Ahead For ASX?

By Greg Peel

Earlier this month the analysts at Morgan Stanley decided there was around 9% downside risk to their FY13 earnings forecasts for the Australian Securities Exchange ((ASX)) based on ongoing weak trading activity. September has indeed seen further weakness, hence Morgan has elected to cut forecasts by 6%. The reason the full 9% has not been factored in is because the analysts see a better than usual improvement in activity in the remainder of the year.

However, the downgrade takes the Morgan Stanley numbers to 3% below consensus, which the broker believes is too high. 

ASX management did not provide a formal trading update on the release of its FY12 result, suggesting it is unlikely to offer any first quarter numbers. An informal trading update is likely at the October 5 annual general meeting, the analysts suggest, at least to acknowledge weaker activity. At that point consensus estimates will appear too optimistic.

In other news, BA-Merrill Lynch has updated its Asia-Pacific Focus List which is a list of those stocks in the Asia-Pacific region for which a panel of Merrills analysts has a strong conviction on their Buy recommendations.

There are no changes to the Australian-listed components of the list, which are Rio Tinto ((RIO)), ANZ Bank ((ANZ)), Treasury Wine Estate ((TWE)), Regis Resources ((RRL)), and Westfield Group ((WDC)). 

 
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article 3 months old

Switzer Super Report: I’m Buying This Company Because…

By Peter Switzer, Switzer Super Report

You all have been asking me for a long time now to share my own views on stocks that I like and at the same time explain the underlying reasons why I think the selected share is a goer. Today marks my capitulation to these requests and the first company I put forward is really outside the kinds of companies I generally invest in – it’s called Audrill Limited ((ASL)).

This week I interviewed the company’s chief financial officer, Jose Martins, for my SWITZER program on the Sky News Business channel, and I was really impressed with the guy.

About Ausdrill

Ausdrill is a mining services group that has lifted its net profit by 53% in the past year. Net profit after tax was $112.2 million – a record high – and for the first time, its revenue went over a billion dollars. That was a 25% gain.

The company works worldwide and has customers such as BHP Billiton ((BHP))  and Newmont. I like the fact that it gets around 60% of its revenue from the gold industry and with all of this QE3-style monetary expansion around the world, some experts think gold is going to soar to US$2,400 an ounce. Leave me out of those predictions, but I do think gold is going up.

Now, you could be asking why would I go for a drilling company with mining slowing? It’s a good question. But exploration drilling only accounts for 11% of the company’s revenue, with last year’s growth driven by drilling for miners that were producing. Jose Martins expects the company’s revenue to grow by 15% this year.

The company’s last share price was at $3.04 – a record – and its dividend last year was 14.5 cents fully-franked. That’s a dividend return of around 4.7%.

It’s not just me

Rudi Filapek-Vandyck of FNArena tells me that in his broker review, five stockbrokers rate Ausdrill a “Buy”, one says “Sell” and one is neutral. Gary Stone of Share Wealth Systems, whose analysis I respect, called Ausdrill one of his 16 gold medal stocks and he likes the fundamentals on it going forward.

“Ausdrill has continued to increase or maintain its dividend payout since June 2002 from 1.5c to 14.5c giving a current dividend yield of 4.8% and a long-term annual DPS (dividend per shares) compounded growth of 25.5%,” he pointed out.

Share price growth over this time has been ten-fold from 30 cents to $3 – that’s an annual compounded growth rate of 26%.

But I liked this observation from Gary: “Ausdrill has long-term annual EPS (earnings per share) compounded growth over the 10 years of 15.63%, indicating that it could intrinsically sustain a PE (price to equity) Ratio of around 15. Currently the PE ratio is around half of that at 8.1. Furthermore the forecast EPS for June 2013 is at 44.7 cents, a further 20% rise.”

The return on equity (ROE) for Ausdrill is sound at 15.6% and it has a reasonable debt to equity ratio at just under-50%.

The company has seen some price pressure and Gary says $2.60 to $2.70 could be a good buying zone given the positive fundamentals, but that might not happen.

My recommendation

Short-term players might want to wait, but I think Ausdrill is a good longer-term play because I reckon the QE3-style stimulus action will generate growth and this will be good for companies in the mining services area.

At the moment the short-termers have driven down prices, but this is a buying opportunity for longer-term stock collectors.

Not to be entirely one-sided, my charts guy Lance Lai is not so certain about the company, especially in the short-term, with technical indicators on the charts not as positive as fundamentals. In the best of worlds, I would like Gary and Lance to give a thumbs up, but both are suggesting that there still could be some downside price movement.

From my point of view, if I bought in now I would buy again on dips to dollar cost average it to a better price.


Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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article 3 months old

Is WorleyParsons Overvalued?

 - Moelis reiterates Sell rating on WorleyParsons
 - Stock viewed as expensive relative to peers
 - Premium not justified by falling margins
 - Earnings visibility also poor


By Chris Shaw

The share price of WorleyParsons ((WOR)) is strongly correlated to the oil price, as Moelis notes around 68% of group revenue is derived from work in the hydrocarbon sector. The oil price doesn't directly impact on revenues, but does have an impact on activity in the sector and the level of capital investment.

Given this, Moelis struggles to justify the current earnings multiple on which WorleyParsons trades, as the broker's numbers suggest the current share price is a 27% premium relative to median multiples for peers.

As Moelis notes, consensus expectations in terms of earnings per share (EPS) growth for WorleyParsons stand at an increase of 17.5% in 2013, broadly in line with the industry median of 18.5%.

This is where the valuation issue comes in, as Moelis points out WorleyParsons is trading on a premium of about 27% to the sector's median earnings multiple for 2013 of around 11.7 times. This is despite evidence of margin erosion in recent years.

This fall in margins reflects the move by WorleyParsons away from pure design to broad based EPCM (engineering, procurement and construction management) or project management contracting. Moelis points out the broader-based work tends to attract lower margins.

As margins have come down for WorleyParsons, Moelis notes top-line growth is now similar to peers, which suggests to Moelis the current multiple premium for the stock is unjustified. This is highlighted by the fact Moelis has a price target on the stock of $24.50, well below the current share price of more than $27.00.

The other issue with WorleyParsons in the view of Moelis is earnings visibility, as the company has not disclosed its backlog of work. In general, Moelis expects capital expenditure by major oil and gas companies will continue to grow, but not at the same rate as in previous years. This implies lower earnings growth for WorleyParsons.

Assuming the current earnings multiple for WorleyParsons will consolidate under such an operating environment, Moelis retains a Sell rating on the stock given the current multiple premium to peers. The only broker in the FNArena database to agree is JP Morgan, who also rates WorleyParsons as Underweight on valuation grounds within the sector.

In total the database shows WorleyParsons is rated as Buy twice, Hold five times and Sell once, with a consensus price target of $27.83. Targets range from JP Morgan at $24.01 to Macquarie at $31.40.

The Buy argument is supported by both Macquarie and BA Merrill Lynch. Macquarie sees upside from potential margin expansion and new contract wins, while BA-ML is attracted to a balance sheet that is rapidly being de-geared.

RBS Australia's Hold rating is supported by the view there is some downside risk for the WorleyParsons share price form overly bullish consensus earnings forecasts being revised down in coming months.

Deutsche Bank also rates WorleyParsons as a Hold for reasons similar to those of Moelis in that the broker doesn't expect margins will return to the peak levels enjoyed in recent years. Citi suggests the stock is fully valued at current levels.

Having traded in a range of $19.95 to $30.09 over the past 12 months, shares in WorleyParsons as at 1.15pm today are unchanged at $27.31 in a weaker overall market. The current share price implies upside of around 2% relative to the consensus price target in the FNArena database. 


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article 3 months old

Downer A Sector Stand-Out

 - BA-Merrill Lynch reinstates coverage on Downer with a Buy
 - Attracted to improved balance sheet and exposure to diverse markets
 - Brokers assess the sector


By Chris Shaw

Having not covered engineering company Downer EDI ((DOW)) for some months, BA Merrill Lynch has re-instated coverage on the company with a Buy rating and $4.70 price target. This brings to seven the total number of Buy ratings on Downer EDI from brokers in the FNArena database, compared to a single Hold rating courtesy of UBS.

For BA-ML, part of the attraction of Downer at current levels is a strengthened balance sheet, as a combination of asset sales, solid execution and working capital management has left debt ratios well below covenant levels. As BA-ML notes, even allowing for the capital intensive nature of Downer's business, the improved balance sheet opens up scope for the resumption of dividends in FY14.

As well, Downer is moving beyond some legacy contract issues, something BA-ML expects will help boost returns going forward. A recent site visit gives greater confidence in this regard, as Deutsche Bank noted Downer has achieved some improvement in both production and quality at its Cardiff rail facility. This improvement led Credit Suisse to suggest there was potential for some new contract wins with the likes of Railcorp.

The other attraction for BA-ML is that Downer has a strong level of work in hand and operates in diverse end-markets. This means exposure to any one sector of the economy is limited. A particular advantage in Downer's case is there is less exposure to leveraged resources capex.

As BA-ML notes, only around 20% of Downer's work in hand is based on resouces capex, the remainder being split across contract mining at about 35% and and civil services and construction at around 45% of current work in hand.

Given Downer has had some issues with respect to project completion in recent years, which BA-ML notes prompted some changes to senior management positions in FY10, the consolidation of operating companies and a greater focus on risk management is comforting.

Execution remains a key variable for earnings, as BA-ML notes a 1% improvement in margins adds around 5% in return on equity terms. Such an improvement would lift Downer's returns to near the top of its peers on the numbers of BA-ML.

To adopt a conservative stance BA-ML has set its forecasts at the lower end of Downer's long-term averages. In earnings per share (EPS) terms the broker is forecasting 47c for FY13 and 53c for FY14, which compares to consensus EPS estimates according to the FNArena database of 47.5c and 52.5c respectively.

For Citi, a potential major downside risk to earnings for Downer EDI comes from the Australian construction sector. Developers and contractors have increased exposure to non-residential and engineering work in recent years, but these markets appear to be headed lower over the short to medium-term.

While in FY12 non-residential and engineering markets represented 75% of total construction work done, Citi's expectation is this market is likely to fall by at least 10% in FY13. Through FY15, engineering and construction spending growth ex-resources is expected to remain relatively flat, reflecting a winding down of government stimulus and a lack of private sector appetite for major projects at present.

This softer outlook in infrastructure and non-residential markets has seen Citi trim earnings forecasts in coming years for the likes of Downer, Leighton Holdings ((LEI)) and Lend Lease ((LLC)), with price targets also being reduced accordingly.

Citi's target for Downer has come down to $4.44 from $4.48, which is below BA-ML's $4.70 price target. The consensus target for Downer according to the FNArena database is $4.47, targets ranging from UBS at $3.85 to $5.02 for RBS Australia.

For BA-ML the stock offers value at current levels, as the broker's earnings estimates imply earnings multiples for the stock of 7.7 times in FY13 and 6.8 times in FY14. Other in the market agree, as in the view of RBS Australia balance sheet concerns for Downer are overdone, meaning the market is undervaluing the stock.


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article 3 months old

Ardent Looking Healthy

 - Ardent expands via fitness club acquisition 
 - Deal boosts Victorian market share
 - Acquisition structure a positive in UBS's view 
 - Associated fund raising to retire debt and fund further growth


By Chris Shaw

Late last week Ardent Leisure ((AAD)) announced the acquisition of ten established Fenix Fitness Clubs and a further two under construction for $60.9 million. The clubs are situated in Victoria and Queensland.

The price paid is higher than what Ardent has historically paid, Macquarie pointing out that on FY12 EBITDA (earnings before interest, tax, depreciation and amortisation) it is understood to be around $9.5 million, which implies a trailing EBITDA multiple of around 6.4 times. This compares to historical multiples for similar acquisitions of 3.5-4.0 times. Even with the higher price the acquisition is expected to deliver mid-to-high single digit earnings accretion.

The premium is justified in the view of Deutsche Bank, due to both the quality and size of the clubs being acquired and the positive impact of Ardent strengthening its market position in Victoria. Deutsche also suggests integration risk with respect to the new clubs will be low, while the acquisition will provide some leverage with respect to both membership numbers and margins.

For UBS the big story for Ardent is not the acquisition but the fact Fenix is to be acquired in an operating company under the listed entity, rather than in Ardent Leisure Trust. This means a stapled structure, allowing Ardent to retain taxed earnings from the operating company.

Ardent has always needed a better operating structure in the view of UBS, but with earnings now available to reinvest in higher growth divisions such as Main Event the group's capital position looks better. 

Macquarie agrees, noting the new structure will also boost cash flow flexibility while helping address the issue that Ardent's capex and dividend payments were not being supported by internal cash flows. Ardent will also be able to slowly build up franking credits, which UBS suggests will allow for a higher level of franking with dividends going forward.

The Fenix acquisition is to be funded by a capital raising and some debt, Ardent announcing a $50 million underwritten placement at $1.28 and up to $20 million from a retail share purchase plan. Ardent has also put in place a new $34 million debt facility. The additional funds will retire debt but over time will also be used to fund growth. Macquarie expects part of this growth will come from an accelerated roll-out of the Main Event format.

On news of the Fenix acquisition brokers have adjusted earnings forecasts for Ardent Leisure. While the acquisition will be accretive, Deutsche Bank has lowered core EPS forecasts by 9% in both FY13 and FY14 to account for a higher expected dividend reinvestment plan participation rate and changes to Main Event roll-out assumptions. EPS forecasts for Deutsche now stand at 11c and 13c respectively. 

RBS Australia has made little change to its FY13 numbers but increased forecasts for FY14 by 2.4%. Consensus EPS forecasts for Ardent Leisure according to the FNArena database now stand at 12.3c for FY13 and 13.7c for FY14. 

Changes to estimates have meant modest increases to price targets, the consensus target according to the database increasing to $1.45 from $1.39. Targets range from Macquarie at $1.33 to RBS Australia at $1.58.

The Fenix acquisition has not prompted any changes to broker ratings for Ardent Leisure, the FNArena database showing two Buy recommendations against three Hold ratings. RBS is responsible for one of the Buy recommendations, this reflecting the view Ardent continues to generate benefits from its asset diversification strategy and the distribution yield of more than 9% in FY13 is attractive.

UBS agrees, attracted to the defensive growth on offer from Ardent and an attractive valuation given an estimated Enterprise Value to EBITDA multiple of around seven times in FY13.

Macquarie counters by arguing while the Fenix acquisition will be accretive to earnings the stock has already rallied solidly as investors have chased yield, to the point Ardent shares are now trading at a significant premium to the market based on earnings expectations. 

Shares in Ardent today are higher in a stronger overall market and as at 10.20am the stock was up 3c at $1.32. Over the past 12 months the stock has traded in a range of $1.005 to $1.40. The current share price implies upside of around 12% relative to the consensus price target in the FNArena database.


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