Tag Archives: Other Industrials

article 3 months old

Tox Free Solutions Confident And Solid

- Solid full year earnings result from Tox Free received nod of approval from stockbrokers
- Further growth expected from additional contract wins
- Growth outlook implies value at current levels
- Stockbrokers broadly positive with ratings

By Chris Shaw

Industrial and hazardous waste management group Tox Free Solutions ((TOX)) delivered what most in the market viewed as a good FY11 profit result, lifting revenue by 45% to $143.6 million and net profit after tax by 68% to $13.3 million.

Earnings growth was driven by stronger than expected margins, observes DJ Carmichael, helped by both improved operational performance and flood remediation work in Queensland. Further margins gains are seen as likely given the recently acquired Waste Solutions division will contribute through FY12.

Revenue gains reflected three new waste management contracts in the period, while DJ Carmichael also noted operating cash flows during FY11 were strong thanks to an improvement in debtor collections. The strength in cash flows meant net debt to equity fell to just 11%.

For FY12 DJ Carmichael is forecasting earnings per share (EPS) growth of 25% given a forecast of 17.2c for the year, rising to 18.8c in FY13. These forecasts compare to consensus EPS estimates according to the FNArena database of 18.4c and 19.9c respectively. Among those in the database, JP Morgan expects EPS growth of 20% in FY12.

While DJ Carmichael's numbers are below consensus in EPS terms, the broker sees earnings risk as to the upside given a contract tender pipeline of $100 million. A good track record with blue chip clients adds to confidence additional contracts will be won, as does significant investment in systems and people in recent years.

This investment via capex is likely to remain elevated, as while capex in FY11 came in at $19.4 million management has guided to $25 million for FY12. This is above DJ Carmichael's forecast of $15.7 million, something seen as reflecting management's confidence in being awarded new contracts.

Following changes to numbers post the FY11 result, DJ Carmichael has moved to an Accumulate rating on Tox Free. The call suggests some value at current levels, as the broker's numbers imply a FY12 earnings multiple of 12.2 times. This is low relative to historical multiples for Tox Free.

DJ Carmichael's Accumulate call is conservative relative to the market, as of the three brokers in the FNArena database to cover Tox Free two have Buy ratings and one, JP Morgan, has a Neutral recommendation.

RBS Australia's Buy similarly reflects value given recent share price weakness, while UBS remains positive on the earnings outlook for Tox Free and so expects the share price will improve. JP Morgan's counter is while earnings growth is expected, this is largely priced into Tox Free at current levels. 

The consensus share price target according to the database is $2.48, which is above DJ Carmichael's valuation for Tox Free of $2.14 per share. This has come down from $2.59 given lower market multiples, the higher than expected near-term capex outlook and a forecast increase in corporate costs.

Shares in Tox Free have traded in a range over the past year of $1.70 to $2.52. The current share price implies upside of a little under 10% relative to the consensus price target in the FNArena database.

 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

Total Buy ratings among brokers in the FNArena database continue to increase as the market works its way through profit reporting season, the database showing 51 upgrades this week against 25 downgrades. Total Buy ratings now stand at 57.9%, up from 56.2% last week.

Among those enjoying upgrades to ratings were Charter Hall Office ((CQO)) as models were adjusted to reflect both better than expected full year earnings and the sale of the group's US portfolio. Charter Hall Retail ((CQR)) similarly enjoyed an upgrade following a solid operational result for the full year.

A similarly good result from Super Retail ((SUL)) has seen ratings upgraded for what is regarded as one of the top picks in the retail sector, while a solid profit result and good earnings momentum in coming years saw upgrades for Challenger Financial Services ((CGF)).

Whitehaven Coal ((WHC)) has been upgraded given its attractiveness among a limited number of options for Australian coal plays, while recent share price weakness has seen an upgrade in rating for Ridley Corp ((RIC)). Others to enjoy upgrades over the past week include Blackmores ((BKL)) and Virgin Blue ((VBA)). 

On the downgrade side Mortgage Choice ((MOC)) has seen ratings lowered by two brokers despite what was regarded a solid profit result, while ANZ Banking Group ((ANZ)) suffered a similar fate post a below consensus trading update.

While the outlook for Beadel Resources ((BDR)) remains positive, the stock has been downgraded following the announcement of a capital raising, while the view risk remains to the downside was enough for Ardent Leisure ((AAD)) to equally receive a downgrade in rating.

Tough macro conditions explain the downgrade for Southern Cross ((SXL)), while new guidance from management is enough to generate a downgrade for Downer EDI ((DOW)). Board infighting is enough to see Mount Gibson ((MGX)) downgraded, while others seeing drops in ratings include Telecom New Zealand ((TEL)) and Telstra ((TLS)).

In terms of price targets, Increases to forecasts for ARB Corporation ((ARP)), Challenger, Mortgage Choice and Whitehaven have driven increases to broker target prices, while changes to models have also seen targets rise for the likes of Kingsgate Consolidated ((KCN)), Perseus Mining ((PRU)) and NRW Holdings ((NWH)).

Targets have fallen for Consolidated Media Holdings ((CMJ)), Seven West Media ((SWM)) and Southern Cross as slower growth expectations are factored into the media sector, while QBE Insurance ((QBE)) also saw cuts to targets as operating conditions remain difficult for the company.

Adjustments to earnings estimates in coming years have meant cuts to targets for Ausenco ((AAX)) and Ardent Leisure, while the board issues at Mount Gibson and a lack of catalysts for Boart Longyear ((BLY)) also impact on price target assessments.

Changes to earnings forecasts are largely profit result related, with increases to forecasts for Santos ((STO)), Woodside ((WPL)), Mortgage Choice, NIB Holdings ((NHF)) and Sedgeman ((SDM)) and cuts for BlueScope Steel ((BSL)), Beadel, QBE Insurance, DUET ((DUE)), Ardent Leisure, Australian Pipeline Trust ((APA)) and Goodman Fielder ((GFF)).

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 CQO - 14.0% 57.0% 71.0% 7
2 CQR - 14.0% 43.0% 57.0% 7
3 SUL 50.0% 100.0% 50.0% 6
4 CGF 57.0% 100.0% 43.0% 7
5 WHC 33.0% 67.0% 34.0% 6
6 BKL 33.0% 67.0% 34.0% 3
7 RIC 33.0% 67.0% 34.0% 3
8 NWH 67.0% 100.0% 33.0% 3
9 AAX 50.0% 80.0% 30.0% 5
10 VBA 43.0% 71.0% 28.0% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MOC 67.0% 33.0% - 34.0% 3
2 ANZ 63.0% 38.0% - 25.0% 8
3 BDR 50.0% 33.0% - 17.0% 3
4 AAD 83.0% 67.0% - 16.0% 6
5 SXL 86.0% 71.0% - 15.0% 7
6 DOW 57.0% 43.0% - 14.0% 7
7 MGX 88.0% 75.0% - 13.0% 8
8 TEL 38.0% 25.0% - 13.0% 8
9 TLS 63.0% 50.0% - 13.0% 8
10 PBG 38.0% 25.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 ARP 8.063 8.675 7.59% 4
2 WHC 6.842 7.108 3.89% 6
3 CGF 5.471 5.603 2.41% 7
4 MOC 1.427 1.460 2.31% 3
5 PRU 3.430 3.508 2.27% 6
6 KCN 9.270 9.456 2.01% 5
7 NWH 3.260 3.310 1.53% 3
8 NCM 44.126 44.626 1.13% 8
9 DXS 0.929 0.936 0.75% 7
10 CQR 3.287 3.310 0.70% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 CMJ 3.197 2.672 - 16.42% 7
2 SWM 4.845 4.103 - 15.31% 8
3 QBE 18.776 16.208 - 13.68% 8
4 AAX 3.375 3.016 - 10.64% 5
5 AAD 1.590 1.445 - 9.12% 6
6 MGX 2.163 1.988 - 8.09% 8
7 SXL 1.864 1.716 - 7.94% 7
8 BLY 4.879 4.544 - 6.87% 8
9 ANZ 24.824 23.399 - 5.74% 8
10 CTX 12.742 12.103 - 5.01% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 STO 49.825 56.313 13.02% 8
2 WPL 183.740 205.667 11.93% 8
3 TOL 44.075 48.513 10.07% 8
4 MOC 14.000 15.267 9.05% 3
5 MRE 5.575 6.067 8.83% 4
6 NHF 12.933 14.067 8.77% 3
7 SDM 17.033 18.500 8.61% 3
8 TEL 17.297 18.353 6.11% 8
9 NWH 23.700 25.133 6.05% 3
10 PRU 19.000 20.100 5.79% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 BSL 3.843 - 0.543 - 114.13% 7
2 BDR 9.300 7.633 - 17.92% 3
3 QBE 158.295 135.288 - 14.53% 8
4 DUE 12.763 10.969 - 14.06% 8
5 AAD 15.167 13.050 - 13.96% 6
6 KCN 119.640 106.880 - 10.67% 5
7 APA 21.563 19.413 - 9.97% 8
8 OGC 16.274 14.917 - 8.34% 3
9 GFF 10.663 9.813 - 7.97% 8
10 SWM 44.513 41.575 - 6.60% 8
 

Technical limitations

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article 3 months old

Icarus Signal New Entries For Today

Daily update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

Matrix Composites & Engineering ((MCE)) had been one outstanding performer in the Australian share market throughout calendar 2010. While the share market overall found the going tough, despite QE2 in the US and ongoing strong support for commodities demand from China, Matrix shares entered the new calendar year priced close to $7. Now consider the shares entered calendar 2010 at no more than $2 and it doesn't take too much imagination as to why Matrix landed on investors' radar in 2010. There was money to be made when all else seemed to stand still!

The new calendar year has not brought an extension to that fabulous run. To the contrary. Everything still seemed fine by March as the share price surged well past $9 (think about this for a few moments) but by late April, when risk assets globally were peaking and topping out, Matrix's share price had already fallen towards $8. It has in essence never stopped falling since. Yesterday, the share price closed at $4.75 after the company's FY11 financials missed market expectations. I was watching a late night "call and we answer" program on financial TV and the host almost couldn't believe it. Net profits up by 85% and the shares close down 10%?

Some people will never learn how the share market works.

There are a few reasons why I mention Matrix Composites & Engineering today. Firstly, there's the usual reminder that popularity does lead to overpricing and one can safely assume Matrix shares had become very popular by the time $7 had become but a distant memory. Secondly, there's the age old observation that while in the short term the share market acts like a voting machine, in the long run true value will come to the surface. In the case of Matrix, the forward looking Price Earnings ratio (PE) had started resembling those of Cochlear ((COH)) and Monadelphous ((MND)), in other words: Matrix had become a high multiple stock.

Is 85% net profit growth enough to be a member of the high multiples club?

Usually the answer would be strongly affirmative. So why are Matrix shares now trading on a single digit PE instead of the 20x from earlier in the year?

The answer probably lies with the fact that JP Morgan, the sole stockbroker in the FNArena universe that covers the stock, foresees no growth for both FY12 and FY13. I repeat: no growth (see also Stock Analysis on the website). As I always point out: being a high multiple stock is a bit like becoming the new world champion. It's easier to get there than to stay there and once you get there, expectations will rise accordingly. It is for this reason I have, in the past, warned about CSL ((CSL)), Cochlear ((COH)) and Wotif.com ((WTF)) shares, to name but a few.

High multiple shares do not combine well with a flattening growth profile. Investors who've stuck to their shares in either of these companies, as well as in Matrix, have learned some hard lessons.

Yet, there is another reason as to why Matrix has remained on my personal radar. JP Morgan is far from the only one who covers the shares and throughout the year, while Matrix shares were trading well above the stockbroker's price target, we received complaints from retail investors whose "other sources" were much more positive on the shares. As such, we received some abuse at times, mostly directed at JP Morgan but also towards "the service we provide" here at FNArena.

I have to add I have not carried any conviction about Matrix. The best I came up with in my replies is that I remain a firm believer in using market consensus, but alas, outside our powers, we are as yet unable to provide any consensus when it comes to Matrix. I sometimes also added that while other experts might be more positive, this didn't by default mean JP Morgan was wrong. The latter message never was one that received any understanding.

Fast forward to this week and yes, 85% growth in FY11 was not enough, because, JP Morgan for example had penciled in 95% growth. In other words: the result missed by no less than 10%. This might explain the market response, even after the gradual de-rating since March.

Equally important, and one key reason as to why Matrix shares have remained on my personal radar since last year, is the fact that strong buying interest in combination with one sole skeptical stockbroker meant that Matrix shares have been trading above target for an extended period. This has now been corrected, the rude way. JP Morgan has post the FY11 release raised its target by 20c to $5.43. This now is well, well, well above the present share price, but it's probably a fair assumption we won't see Matrix shares back at $9 anytime soon.

My congratulations to the analysts at JP Morgan. You have been responsible for some abuse aimed at us over the past months, and you have probably been directly responsible for as to why some investors decided not to take up a paid subscription to our service, but you have been proved correct in the longer run. It will be interesting to see whether those who sent in their emails with acid and skepticism, will now return on a more apologetic note. I am not holding my breath. Investors who lose money usually go feral, blaming the experts who've guided them into the wrong direction. No room for self-reflection or acknowledgment that someone was having it right all the time, and right under their radar.

Icarus' list of stocks trading close but still below consensus target has grown to 11 following renewed buying momentum for the share market in general this week. Investors should pay attention to the finer details as many of these stocks have experienced cuts to price targets in combination with a rising share price.

There are now 18 stocks trading above target, including newcomers Mondalphous ((MND)), QR National ((QRN)) and Walter Diversified ((WDS)). All three prove in their own way that being popular in the share market does come with a bloated share price.

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

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Price($) Difference(%)
1 BKL $ 30.00 $ 30.88 2.93%
2 DMP $ 6.78 $ 6.97 2.73%
3 GOZ $ 1.89 $ 1.90 0.53%
4 KCN $ 9.30 $ 9.46 1.68%
5 LEI $ 21.95 $ 22.43 2.18%
6 MCP $ 3.09 $ 3.11 0.65%
7 TGR $ 1.36 $ 1.36 0.00%
8 TWE $ 3.31 $ 3.36 1.54%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Price($) Difference(%)
1 MND $ 18.82 $ 18.81 - 0.05%
2 QRN $ 3.30 $ 3.28 - 0.64%
3 WDS $ 0.74 $ 0.74 - 0.68%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Price($) Difference(%)
1 ELD $ 0.29 $ 0.50 73.45%
2 HFA $ 0.90 $ 1.56 73.33%
3 VBA $ 0.24 $ 0.40 70.64%

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

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article 3 months old

Amcor Offers Growth, Synergies And Capital Management

- Amcor result better than consensus expectations
- Synergies ahead of schedule, continue to drive earnings
- Buyback announced, more capital management expected
- Brokers now unanimous with Buy ratings

By Chris Shaw

Consensus expectations for full year earnings from packaging group Amcor ((AMC)) were for a net profit of around $539 million, so the result of $570 million was clearly better than expected. 

As UBS points out, the result was driven by the earlier delivery of synergies related to the Alcan acquisition. RBS Australia notes Amcor generated synergy benefits of $142 million FY11, which compared to a target for the year of $100-$120 million. This means Amcor has achieved the bottom end of the synergy target range of $200-$250 million in total gains a year ahead of schedule.

As well, management has announced a $150 million share buyback, the capital management initiative also coming a year earlier than RBS had anticipated. The buyback suggests to RBS that management is confident in the earnings and operating outlook for Amcor, while as Credit Suisse notes even allowing for the buyback the balance sheet remains in solid condition.

Further capital management initiatives are possible as BA Merrill Lynch estimates in FY13 Amcor should generate free cash flow of more than $800 million. With target gearing of 45-50%, this offers significant scope for more capital returns in BA-ML's view.

Citi agrees, estimating Amcor could announce capital management moves totaling $1.0-$1.5 billion over the next 2-3 years given increasingly strong cash flows.

Looking forward, synergies from Alcan should continue to be the key growth driver for Amcor, with Credit Suisse remaining above management's guidance in terms of expected synergies in coming years. Risk is to the upside if management can execute properly, notes Credit Suisse.

Post the profit result brokers have made relatively minor adjustments to earnings estimates. Citi lifted estimates for FY12 slightly to account for the buyback but reduced forecasts in FY13 to factor in changed currency expectations.

RBS has gone the other way and trimmed its numbers by about 5% in FY12 given changed currency estimates, while UBS has also made minor cuts to its forecasts. Consensus earnings per share (EPS) estimates according to the FNArena database stand at 53.8c for FY12 and 63.1c for FY13, compared to a result of around 46c for FY11.

There has been one change in rating for Amcor post the profit result, UBS upgrading to Buy from Neutral on valuation grounds. As UBS notes, at current levels Amcor is trading at a discount to the Industrials sector despite a strong and visible earnings growth outlook and scope for additional capital management moves.

The upgrade brings UBS into line with the rest of the market, as the FNArena database now shows a perfect eight-for-eight Buy ratings for Amcor. As Credit Suisse notes, Amcor should be able to continue to lift group earnings through acquired earnings, related synergies and capex growth, even assuming little in the way of organic growth.

The consensus price target according to the database is $7.90, down slightly from $8.05 prior to the result. Price targets range from $7.50 to $8.50.

Over the past year the stock has traded in a range of $5.87 to $7.43, the current share price implying upside of around 17% to the consensus price target in the FNArena database.

 

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article 3 months old

Mermaid Has Legs

- Mermaid Marine delivers strong profit result
- Brokers expect more growth in FY12 as oil and gas activity expands
- RBS upgrades to a Buy rating on valuation grounds

By Chris Shaw

Profit for FY11 of $43.2 million for marine services provider Mermaid Marine ((MRM)) was an increase of 37% relative to FY10, a result better than most in the market had been expecting. The result was delivered on a 49% increase in revenues, meaning margins fell slightly during the period.

RBS Australia notes the fall in margins was the result of a larger mix of lower-margin chartered vessels during the period. While this trend is expected to continue, UBS expects Mermaid Marine will be able to continue to deliver solid earnings growth.

This is due to strong demand for Mermaid's service from LNG projects along the North West Shelf. As examples, Macquarie notes the Gorgon and possibly the Wheatstone gas projects are proceeding, while other opportunities include the Macedon, Inpex, Pluto-2, Sunrise and Browse projects.

It is not only the number of projects that is a positive in the view of Macquarie, as the size of projects under consideration is also favourable in terms of the potential boost to earnings for Mermaid Marine. This is especially the case given Mermaid's strong position in the oil and gas service market in Western Australia.

Another plus in Macquarie's view are reasonable barriers to entry in the Australian vessel market, which includes a union requirement of Australian crewed ships. Safety regulations and high mobilisation costs given Australia's relatively isolated position are other barriers to entry.

Vessels accounted for 56% of earnings for Mermaid Marine in FY11, while supply base operations accounted for the other 44% of profit. An extension of Mermaid's wharf facilities is generating new exploration business, so Macquarie expects continued solid earnings growth from the supply base operations as utilisation rates increase.

While the full year result did not include specific guidance for earnings in FY12, RBS notes management at Mermaid Marine did offer positive outlook commentary. To reflect this and the result, earnings forecasts across the market have been lifted.

In earnings per share (EPS) terms RBS has lifted its estimates by 7-8% for FY12 and FY13, while both Macquarie and UBS have lifted their numbers by a smaller percentage. Consensus EPS estimates for Mermaid Marine according to the FNArena database now stand at 23c and 25.3c respectively, with Macquarie suggesting earnings risk remains to the upside.

When added to the strong full year earnings result, RBS suggests recent weakness in the Mermaid Marine share price has increased the value on offer. As a result, RBS has upgraded to a Buy rating from Hold previously, while its price target is essentially unchanged at $3.55.

Most of the market agrees with the newly positive view of RBS, as the FNArena database shows Mermaid Marine is Rated Buy four times and Hold once. This comes courtesy of Deutsche Bank, the broker arguing while there is potential earnings upside this is reflected in the share price at current levels.

The less aggressive view of Deutsche Bank is reflected in its price target, which at $3.15 is some way below the consensus price target according to the FNArena database of $3.50. Targets for the other four brokers to cover Mermaid Marine range from $3.40 to $3.80.

Shares in Mermaid Marine today are slightly lower, trading down 3c at $3.11 as at 1.45pm. Over the past year the stock has traded in a range of $2.42 to $3.44. The current share price implies upside of around 12% to the consensus price target in the FNArena database.
 

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article 3 months old

All Buys On SAI Global

- SAI Global delivers better than expected profit result
- Guidance for FY12 positive, acquisitions also expected to deliver growth
- Earnings estimates lifted, Citi upgrades to a Buy rating

By Chris Shaw

Standards and compliance group SAI Global ((SAI)) yesterday delivered a 42% increase in net profit to $48 million, a result above most expectations in the market. Earnings growth was helped by the acquisition of Integrity Interactive during the period and organic growth from the Assurance and Information Services division.

In terms of divisional performance, Citi notes the Compliance division performed better than expected following the Integrity Interactive acquisition, while the Assurance division performed very well and lifted margins by 250-basis points relative to the previous year. On the flip side, Citi notes Information Services struggled amid a weak property market and the stronger Australian dollar.

Along with the result management at SAI Global delivered what UBS viewed as positive outlook commentary, with expectations for further organic sales growth and margin expansion in FY12. In UBS's view this positive commentary highlights the resilience of SAI Global's business.

On the back of the full year result and the comments provided by management, UBS and others in the market have lifted earnings forecasts in coming years. In earnings per share (EPS) terms UBS has lifted its forecasts by 4-5% through FY14, while Citi's forecasts have increased by 5% this year and by 2% in FY13. Consensus EPS forecasts according to the FNArena database now stand at 30.6c for FY12 and 35.7c for FY13. 

As Macquarie notes, the fact most of SAI Global's revenue streams are annuity and non-discretionary in nature means FY12 should deliver another year of double-digit earnings growth. This growth should be complemented by further acquisitions, given the offshore operations of SAI Global are presently somewhat immature. 

Acquisitions should be helped by a strong balance sheet, Citi noting as at the end of FY11 cash on hand had increased by 56% to $52.3 million. Along with acquisitions RBS Australia sees scope for growth via new products, while also expecting SAI Global will take advantage of opportunities to lift market share in areas such as the food safety division.

The other advantage in terms of earnings growth highlighted by UBS is SAI Global enjoys leading positions in global markets and its operations are scalable. This leaves the group well placed to benefit from a continuation of the trend towards outsourcing within financial services, as well as from the ongoing burden of increased Governance, Risk and Compliance obligations faced by many companies.

Following SAI Global's profit result there has been only one change in rating, Citi upgrading to a Buy recommendation from Hold previously. This upgrade is a valuation call, as on Citi's numbers SAI Global is trading on a FY12 earnings multiple of 14.5 times, which is a discount to the five year average multiple of 15.7 times.

The upgrades brings Citi into line with the recommendations of the other brokers in the FNArena database covering SAI global, as the database now shows a perfect seven-for-seven Buy ratings. The consensus price target for the stock is $5.48, up from $5.43 prior to the result.

Shares in SAI Global today are slightly weaker and as at 12.15pm the stock was down 2c at $4.58. This compares to a trading range over the past year of $3.84 to $5.15. The current share price implies upside of around 19% relative to the consensus price target in the FNArena database.

 
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article 3 months old

Are Weaker Equity Markets The Risk For Imdex?

- Imdex delivers solid full year result
- Most brokers suggest stock offers value
- BA-ML more cautious given weak equity markets
- This poses a risk to exploration spending and earnings for Imdex

By Chris Shaw

Drilling fluids and services group Imdex ((IMD)) reported full year net profit of $29 million, which was an increase of 197% on the previous corresponding period. The earnings growth was thanks to a strong recovery in global exploration activity and associated demand for the group's drilling fluids and instruments.

As Deutsche Bank notes, revenue growth for the period was 53%, which means Imdex enjoyed stronger margins in FY11. The tax rate for FY11 was also lower, so in Deutsche's view the adjusted result was broadly in line with expectations for the period.

On the back of the result, management at Imdex has indicated FY12 should deliver further gains as a result of both higher revenues and further margin expansion. Also supportive, notes Deutsche Bank, is an ongoing positive outlook for drilling activity and potential gains from Imdex delivering new products and services.

Given such an outlook Deutsche has made minor increases to earnings estimates through FY14. In earnings per share (EPS) terms Deutsche now expects results of 20c in FY12 and 24c in FY13, up from the 16c delivered in FY11.

As stockbroker Moelis notes, there should also be some earnings growth from the recent ADS and System Mud acquisitions, the deals adding to both drilling fluids manufacturing capabilities and Imdex's presence in the Latin American market.

Assuming no adverse weather conditions in Queensland in particular, Moelis is expecting solid earnings growth in FY12 and has also lifted EPS forecasts by around 3% in coming years. Moelis is now expecting EPS of 20.7c in FY12 and 24.1c in FY13.

BA Merrill Lynch is broadly in line with its EPS estimates for Imdex of 20c in FY12 and 25c in FY13, but suggests a lower earnings multiple is warranted at present as a thriving exploration market needs both strong metal prices and strong equity markets and the latter is currently lacking.

On the plus side BA-ML has not reduced earnings forecasts to reflect less than ideal operating conditions, largely because current earnings momentum is being driven by budgets already set and there is a lag of around one year between equity market movements and exploration budgets.

But given the current environment, BA-ML suggests an appropriate earnings multiple for Imdex is around 10 times, as this would be one standard deviation below the mean for the small cap industrials average.

To reflect this BA-ML has cut its price target for Imdex to $2.20 from $2.66, the broker's revised target well below the consensus price target according to the FNArena database of $2.50. Moelis is not in the database but has a target of $2.60 per share on Imdex.

On the back of its lower price target, BA-ML has downgraded Imdex to Neutral from Buy, while RBS Australia, Deutsche and Moelis all retain Buy recommendations. The key reason for BA-ML's downgrade is the correlation between minerals exploration budgets and equity markets. 

As junior miners, which account for 30-40% of total minerals exploration spend, rely on equity capital markets to fund growth, an equity downturn limits the ability of these companies to raise funds. This impacts on overall budgets in the following year.

However, RBS suggests overall most mining balance sheets are extremely healthy, something expected to support a positive outlook for global exploration activity over the next two to three years. As well, RBS points out key commodity prices, gold in particular, have remained at elevated levels despite the recent market volatility. This is seen as another positive for exploration spending.

On RBS's numbers, Imdex trades at a 10% discount to the Small Industrials sector, which is enough to justify a Buy rating given still strong end markets. Moelis agrees, pointing to potential upside bias for earnings from bolt-on acquisitions and from expected improved performance from the Oil and Gas division.

Imdex shares today are slightly higher and as at 11.10am the stock was up 3c at $2.18. This compares to a range over the past year of $0.775 to $2.49. The current share price implies upside of around 14% to the consensus price target in the FNArena database. 


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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The volatility in equity markets in recent sessions has had a noticeable impact on broker ratings, as the FNArena database saw 42 ratings upgrades (unusually high) compared to just six downgrades in the past week. Total Buy recommendations from the eight brokers contained in the database now stands at 54.97%, up from 53.2% last week.

Among those enjoying upgrades in ratings were Oakton ((OKN)), following a profit result that while weak offered some evidence of a turnaround in the key Victorian market. Coca-Cola Amatil ((CCL)) also enjoyed some upgrades post its interim earnings result, reflecting defensive earnings growth and an improved valuation following market weakness.

An improved valuation following recent share price weakness sparked ratings increases for Transurban ((TCL)), while a better than expected result from Domino's Pizza ((DMP)) generated upgrades as brokers factor in further strong earnings growth in coming years. Others to receive upgrades during the week include Extract Resources (EXT)) and Navitas ((NVT)). 

A potential takeover from major shareholders Rio Tinto ((RIO)) and Mitsubishi have caused brokers to downgrade ratings on Coal and Allied ((CNA)), price targets also being adjusted to reflect the implied value of the proposal. 

Refinancing concerns are behind a downgrade in rating for The Reject Shop ((TRS)), while an initiation of coverage on Sandfire Resources ((SFR)) at Underweight has brought down average ratings on the company.

In terms of price targets, increases to forecasts for Domino's Pizza translated into higher price targets, while an increase in reserves at Extract saw one broker lift its target for that stock. Greater confidence in earnings in the coming year have resulted in a price target increase for Programmed Maintenance Services ((PRG)), while Transurban saw some modest increases to targets post its profit result.

On the other side of the ledger, Harvey Norman delivered lower 4Q sales and this was met by some cuts to earnings estimates and price targets, though there were no associated changes in ratings. Myer ((MYR)) suffered by association in terms of targets and estimates being reduced.

Tough retail conditions also saw cuts to targets for The Reject Shop, while a more significant downgrade in target for Oakton ((OKN)) by one broker offset some modest target increases elsewhere. Difficult market conditions have seen targets trimmed for Stockland ((SGP)), while a somewhat lower quality result has seen cuts to both earnings estimates and targets for Bendigo and Adelaide Bank ((BEN)). 

Changes to forex assumptions translated into higher earnings estimates for Aquila Resources ((AQA)) and Paladin ((PDN)), while estimates for Mount Gibson ((MGX)) were adjusted following a solid full year earnings result.

With BlueScope ((BSL)) announcing some writedowns brokers have responded by cutting earnings estimates, while Duet Group ((DUE)) announced a capital raising during the week and this has also seen changes to earnings forecasts as models are adjusted accordingly.

A weak outlook has resulted in cuts to estimates for Computershare ((CPU)), while a disappointing price for the sale of US assets has caused brokers to adjust numbers for Charter Hall Office ((CQO)) lower. 
 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
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Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 OKN 40.0% 100.0% 60.0% 5
2 CCL 38.0% 88.0% 50.0% 8
3 DMP 33.0% 83.0% 50.0% 6
4 LEI - 25.0% 13.0% 38.0% 8
5 EXT 33.0% 67.0% 34.0% 3
6 TCL 71.0% 100.0% 29.0% 7
7 NVT 14.0% 43.0% 29.0% 7
8 AZT 50.0% 75.0% 25.0% 4
9 AQA - 50.0% - 25.0% 25.0% 4
10 CDI 25.0% 50.0% 25.0% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 SFR 100.0% 33.0% - 67.0% 3
2 CNA 80.0% 20.0% - 60.0% 5
3 TRS 75.0% 50.0% - 25.0% 4
4 AIZ 100.0% 75.0% - 25.0% 4
5 WEB 50.0% 25.0% - 25.0% 4
6 BHP 75.0% 63.0% - 12.0% 8
7 IPL 71.0% 63.0% - 8.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 DMP 6.670 6.965 4.42% 6
2 EXT 8.600 8.767 1.94% 3
3 CNA 121.200 123.500 1.90% 5
4 PRG 2.326 2.361 1.50% 7
5 PNA 4.527 4.587 1.33% 7
6 TCL 5.793 5.864 1.23% 7
7 APA 4.358 4.383 0.57% 8
8 CDI 0.563 0.565 0.36% 4
9 CFX 2.001 2.004 0.15% 7
10 PDN 3.193 3.194 0.03% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 HVN 3.084 2.778 - 9.92% 8
2 TRS 13.350 12.375 - 7.30% 4
3 OKN 2.536 2.354 - 7.18% 5
4 SGP 4.021 3.734 - 7.14% 7
5 BEN 9.879 9.240 - 6.47% 8
6 LEI 23.701 22.630 - 4.52% 8
7 MYR 3.054 2.941 - 3.70% 8
8 CQO 3.493 3.381 - 3.21% 7
9 SFR 8.565 8.293 - 3.18% 3
10 BHP 54.444 52.910 - 2.82% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQA 6.000 11.867 97.78% 4
2 TCL 11.286 12.157 7.72% 7
3 PDN 5.602 6.020 7.46% 7
4 DMP 34.050 35.250 3.52% 6
5 MGX 42.600 43.214 1.44% 8
6 AGK 103.000 103.913 0.89% 8
7 CWN 52.988 53.363 0.71% 8
8 CHC 21.533 21.683 0.70% 6
9 QRN 16.263 16.375 0.69% 8
10 BKN 71.167 71.417 0.35% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SFR 12.000 - 3.233 - 126.94% 3
2 BSL 8.371 6.786 - 18.93% 7
3 DUE 14.100 12.763 - 9.48% 8
4 CPU 59.182 54.409 - 8.06% 7
5 CQO 26.686 24.686 - 7.49% 7
6 AIZ 10.700 9.938 - 7.12% 4
7 OKN 21.820 20.480 - 6.14% 5
8 JBH 145.463 138.738 - 4.62% 8
9 ALL 11.013 10.513 - 4.54% 8
10 CDI 5.000 4.775 - 4.50% 4
 

Technical limitations

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article 3 months old

Solid Result, Solid Outlook For Bradken

- Bradken's full year result met last year's guidance
- Guidance for FY12 implies further solid earnings growth
- Forecasts and targets adjusted, Brokers maintain Buy ratings

By Chris Shaw

In August of last year management at consumable products and capital equipment group Bradken ((BKN)) guided to a FY11 EBITDA (earnings before interest, tax, depreciation and amortisation) result of $192-$200 million and yesterday full year earnings were confirmed in the middle of this range.

Bradken's EBITDA for FY11 printed $196.1 million, RBS Australia noting the result implied strong 2H performance of around $106 million despite adverse currency movements, wet weather and an expected decline in earnings from the rail division.

BA Merrill Lynch saw the three key takeaways of the result as solid revenue growth, an increase in marginal gross profit and a capital heavy growth path for Bradken, the latter confirmed by an underwritten dividend reinvestment plan for the final dividend for FY11.

Along with the result, RBS notes Bradken management reiterated expectations for further solid EBITDA growth in FY12, which would translate to net profit after tax growth of 35-40% for the year. As the result was in line with previous guidance and guidance for the coming year has been maintained, changes to earnings estimates across the market have been modest.

As examples, RBS has cut its earnings per share (EPS) estimates by 0-1% through FY13 and Deutsche Bank has trimmed its numbers by 2-7% respectively. Consensus EPS estimates for Bradken according to the FNArena database now stand at 71.6c for FY12 and 82.2c for FY13, which compares to the 61c achieved in FY11.

The earnings outlook appears well supported, RBS noting the US and Rail business enjoyed a strong order book in the fourth quarter of FY11 and this shows no signs of weakness despite the current uncertain macroeconomic environment.

As well, UBS notes Bradken is now a different business than in the previous cycle, as recent acquisitions mean consumable products account for about 70% of group sales, while sales to international markets are now a larger part of the group's business.

These changes represent proactive steps by management in the view of UBS and should support capitalised annual growth in net profit after tax of 21% over the next three years on the broker's numbers.

Credit Suisse also supports Bradken's move to increase the focus on core mining consumables, seeing the move as providing some volume and demand stability even allowing for volatile markets. Internally funded capex is also expected to deliver additional support to earnings in coming years.

Estimates are slightly more conservative than those of UBS but Credit Suisse still expects Bradken will be able to generate average annual earnings growth of 15% to FY14. This is before any improvement in commodity volumes.

While changes to earnings estimates have been modest, price target cuts for Bradken have been more pronounced, this a reflection of both higher working capital assumptions and a marking to market of key valuation assumptions.

The FNArena database shows a consensus price target for Bradken of $9.41, down from $9.89 prior to the profit result. Targets range from $8.70 to $10.15. What hasn't changed is the positive view of brokers covering Bradken, as the database shows a perfect six-for-six Buy ratings. 

Shares in Bradken today are stronger and as at 11.05am the stock was up 46c or a little more than 6% at $7.96. This compares to a trading range over the past year of $6.82 to $9.60. The current share price implies upside to the consensus price target in the FNArena database of around 18%. 


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article 3 months old

More Growth Ahead For Flexigroup

- Flexigroup delivers solid full year result
- Diversity, new product categories offsetting tough trading conditions
- Guidance for FY12 suggests confidence in earnings
- Brokers retain Buy ratings

By Chris Shaw

Flexigroup ((FXL)) provides vendor and retail point-of-sale finance and telecommunications services, with operations in Australia, New Zealand and Ireland. The company yesterday announced full year earnings of $51.8 million, a result broadly in-line with market expectations and guidance from management.

Given the challenging retail environment, stockbroker Moelis takes the view the result by Flexigroup was a solid one. UBS agrees, seeing net profit before tax growth of 23% in year-on-year terms as impressive given the current weakness in retail sentiment.

The result also highlighted the benefits of Flexigroup's diverse range of operations. As Goldman Sachs points out, 37% of group net profit was generated from businesses created or acquired in the past three years. 

This means while product price deflation in the IT and electrical sectors continues to be a major headwind, Goldman Sachs notes this is being more than offset by entry into new product categories in both the Flexirent and Certegy businesses.

As examples of the benefits of moving into new product categories, Goldman Sachs notes deal value in Certegy was up by 30% and in Flexirent by 6%. The growth in the former was largely driven by solar and fitness equipment, while gains in the latter were driven by trade and refrigeration equipment.

Growth looks set to continue, UBS pointing out management intends to pursue new internet offerings such as deferred payment processing for business. Distribution relationships are likely to be the key to growth in this area according to UBS.

There should also be growth from existing operations, Moelis noting Flexirent Commercial tripled lease volumes in FY11 thanks to maturing relationships with vendors. Further maturing of these relationships should generate additional growth, especially as Moelis sees this market as becoming less competitive.

Despite current uncertainty in the Australian retail sector in particular, management at Flexigroup has enough confidence to offer earnings guidance for FY12. Guidance is for net profit growth of 12-15%, which Goldman Sachs notes implies a cash result in a range of $59.2-$60.8 million.

Earnings estimates have been adjusted to reflect this guidance, Goldman Sachs lifting its forecasts by 10% and UBS by 4%. In earnings per share (EPS) terms the broker now expects 21.3c in FY12 and 22.6c in FY13, while Moelis is forecasting EPS of 20.4c and 22.8c respectively. Consensus estimates according to the FNArena database stand at 22c for FY12 and 26.3c for FY13.

Goldman Sachs estimates Flexigroup is trading on earnings multiples of 8.6 times in FY12 and 8.1 times in FY13, which are discounts to the Small Industrials index of 17% and 10% respectively. This discount is despite Flexigroup being expected to deliver 9% capitalised annual growth in EPS over the next three years. 

This is before any acquisitions, which are possible according to Goldman Sachs given $86 million in net cash available.

This value makes Flexigroup a Buy at Goldman Sachs, a view shared by Moelis, UBS and Macquarie.

The consensus share price target according to the FNArena database is $2.35, while Moelis has a target of $2.10 and Goldman Sachs of $2.46. The consensus target implies upside of better than 40% from current share price levels.

Shares in Flexigroup today are weaker on another very weak day for the Australian share market. As at 11.00am the stock was down 20.5c at $1.625. This compares to a trading range over the past year of $1.175 to $2.39.
 

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