- Norfolk reiterate earnings guidance at AGM
- Update highlights the resilience of group earnings
- Moelis sees value, retains a Buy rating

By Chris Shaw

Norfolk Group ((NFK)) provides integrated electrical, communications, heating and air conditioning and fire protection services, management concentrating operations on the resources and government sectors. The focus is on building strong relationships with clients to assist in maintaining contracts.

The strategy appears to be paying off, as at the recent annual general meeting Norfolk management reiterated previous guidance for net profit after tax growth in FY12 of 10-15%. As Moelis notes, this comes off a relatively high base in FY11, where underlying earnings rose by 15%.

For Moelis the confirmation of previous guidance highlights how resilient earnings are for Norfolk. This reflects the fact the O'Donnell Griffin division, which comprises the electrical and communications businesses, has a strategic focus on counter-cyclical segments of the economy and operations where there is less competition for national contracts.

This is significant, as Moelis notes the O'Donnell Griffin division accounts for 85% of group earnings and in FY11 delivered solid increases in revenues and earnings before interest and tax (EBIT). Continued solid performance is expected, especially as the division has recently won two new contracts worth $56 million. 

Not all the AGM news was as good, as Moelis points out the Haden division, which is the air conditioning installation and maintenance business, reported a 13% fall in revenues and an 82% fall in EBIT in FY11. 

The Haden operations account for around 6% of group earnings and 30% of revenues and on the plus side Moelis points out internal initiatives are generating improved performance from this division that is expected to continue in coming months.

To reflect the AGM commentary from Norfolk, Moelis makes no major changes to earnings estimates going forward. In earnings per share (EPS) terms Moelis is forecasting outcomes of 14.5c in FY12 and 16.4c in FY13, while the FNArena database shows consensus EPS estimates of 15c and 16.9c respectively.

The forecasts from Moelis sit slightly ahead of management's guidance, the broker suggesting management is taking a conservative approach with respect to earnings in coming years. This reflects the potential for earnings in the O'Donnell Griffin division to be impacted by some larger contracts being delivered in FY13 rather than FY12.

The share price of Norfolk has been strong in recent months, Moelis noting the stock has gained 26% over the past year. This is solid outperformance relative to the Small Industrials index.

Despite the gains Moelis continues to see value, pointing out on its forecasts Norfolk is trading on a FY12 earnings multiple of less than nine times. This is viewed as undemanding, particularly given the resilience of earnings.

Given the value on offer Moelis rates Norfolk as a Buy, with a price target of $1.45. The FNArena database shows others agree there is value in the stock, as both RBS Australia and JP Morgan also rate Norfolk as a Buy. The consensus price target according to the database is $1.58.

Shares in Norfolk today are slightly higher and as at 10.40am the stock was up 1.5c at $1.26. This compares to a trading range over the past year of $0.94 to $1.43. The consensus price target according to the FNArena database implies upside of almost 27% from current levels.

 
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- DJ Carmichael initiates on Fleetwood with Hold rating
- Searipple accommodation village offers some short-term concerns
- Longer-term outlook positive but stock viewed as fair value at current levels

By Chris Shaw

Fleetwood (FWD)) has for some time offered an attractive combination of exposure to the resources sector via manufactured accommodation for the resources, lifestyle and public sectors and earnings diversification from exposure to retirement spending through the manufacturing of recreational vehicles, caravans in particular.

Perth-based stockbroker DJ Carmichael has initiated coverage on Fleetwood ((FWD)) with a Hold rating,  as prior to this week's broad based share market sell-off, the share price was seen trading broadly in-line with the broker's $11.50 price target.

As DJ Carmichael notes, one recent point of concern with respect to Fleetwood was the Searipple accommodation village in Karratha in WA. At Searipple there is potential for excess supply of accommodation given expected delays by Woodside ((WPL)) with respect to a final investment decision on the Pluto 2 Expansion Project.

The market appears to have become more comfortable with the outlook for Searipple given a share price gain of 15% since mid June. The rally in the stock follows news Rio Tinto ((RIO)) was to take some of the rooms vacated by Woodside, but DJ Carmichael suggests it remains too early to turn more positive from an investment perspective.

The stockbroker is of the view there remains scope for the Karratha accommodation market to be softer than the market expects in FY12, especially given Woodside remains the major tenant at Searipple and the company is likely to conduct a full review of all development projects now that a new CEO is in command.

This is important for Fleetwood, as DJ Carmichael points out the company now generates around 75% of EBIT (earnings before interest and tax) from manufactured operations and 25% from recreational vehicles. By way of comparison, these splits were broadly the opposite back in FY05.

This means confirmation of additional accommodation contract wins is needed before DJ Carmichael could justify a more bullish shorter-term view. Taking a longer-term view, DJ Carmichael expects utilisation at Searipple will increase.

There is also potential for Fleetwood to win a major manufactured accommodation contract over the next year or so, such as for Chevron's Wheatstone project. This suggests strong earnings growth should resume from FY13, while in the meantime investors can enjoy a better than 6% fully-franked dividend yield.

The stockbroker's view remains the value is just not there for Fleetwood at present and this view seems broadly shared by other brokers to cover the stock, as the FNArena database shows Fleetwood is rated as Hold three times compared to two Buy ratings.

The Hold ratings are generally valuation based, Macquarie for example being attracted to the high dividend yield and solid earnings growth outlook, but unable to justify a higher rating at current share price levels.

The two Buy ratings in the database are courtesy of RBS Australia and UBS and reflect potential upside given respective share price targets of $14.80 and $13.50. Other targets range between $11.25 and $11.75, while the consensus price target in the database stands at $12.60. Investors should note both RBS and UBS haven't updated their view in recent times.

In terms of earnings expectations, DJ Carmichael is forecasting earnings per share (EPS) outcomes of 88.3c this year, 82c in FY12 and 96.7c in FY13, while consensus estimates according to the FNArena database stand at 88.8c for FY11 and 91.5c for FY12. Forecasts for FY13 range from 85.7c to 95.7c.

The current share price implies upside of around 10% to the consensus price target in the FNArena database.
 

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- Boart Longyear's earnings guidance seen as conservative
- Strong earnings should continue into 2012 as exploration activity ramps up
- Upside earnings risk and recent price weakness support Buy ratings

By Chris Shaw

Last week Macquarie announced its forecasts for interim earnings this month for drilling products and services provider Boart Longyear ((BLY)). Estimates were for revenues of US$894 million, EBITDA (earnings before interest, tax, depreciation and amortisation) of US$147 million and net profit of US$64 million. 

Second half earnings are expected to be even better in Macquarie's view, reflecting seasonal factors and benefits from further improvements in pricing and a ramp-up in demand gaining pace over the course of the full year.

Assuming Macquarie proves correct in expecting an earnings split of 43%:57% for 1H:2H respectively, this implies guidance from management for full year revenue of US$1.75 billion and US$300 million in EBITDA is likely to prove conservative.

What supports Macquarie's view is the fact risk factors remain favourable, as pricing power is returning, both major and junior resource companies are spending money and utilisation rates are increasing.

To reflect this, Macquarie's forecasts for full year revenue and EBITDA and revenue stand at US$1.92 billion and US$344 million respectively. These estimates are 15% and 10 above management's guidance.

Citi also sees scope for strong earnings for Boart Longyear, pointing out miners are currently ramping up greenfield exploration activity. As examples, year-to-date spending on gold and copper exploration are up 13% and 21% respectively when compared to 2010 levels. 

Record volumes are expected in 2012 given a tight correlation between exploration spending and prior year commodity prices. As well, Citi estimates junior miners have around $3 billion in surplus exploration cash, an amount that would underpin a material increase in total exploration spending. 

The increase in exploration activity should boost volume growth, while Citi also notes greenfield drilling commands a 10-15% price premium. This is a positive for margins for Boart Longyear.

Given the expectation of a return to peak pricing by the middle of 2012, Citi suggests consensus earnings forecasts for Boart Longyear for FY12 and FY13 are currently too low. Citi is forecasting earnings per share (EPS) of US31.8c this year, rising to US43.8c in 2012 and US53c in 2013.

Macquarie in contrast is forecasting EPS of US35.1c this year, US42.6c in 2012 and US47.7c in 2013, while RBS Australia is forecasting EPS of just US31c this year, US40c in 2012 and US45c in 2013. JP Morgan is even more conservative, forecasting EPS this year of US29.5c and in 2012 of US37.8c.

For both Macquarie and Citi the scope for better than expected earnings supports a Buy rating for Boart Longyear, a recommendation reinforced by recent relative share price underperformance. As Macquarie notes, Boart Longyear has lost around 6% since mid-June, while Major Drilling has gained 12% and Layne Christiansen has risen by 9%. 

This underperformance has left Boart Longyear trading at a 5-13% discount to global peers and a 7-37% discount to domestic peers on Macquarie's estimates. The underperformance in recent weeks has also improved the value on offer, as Citi calculates Boart Longyear is currently trading on a FY12 earnings multiple of 10.4 times. 

Overall, the FNArena database shows Boart Longyear is rated as Buy five times and Hold three times. One of the Hold ratings is courtesy of Deutsche Bank, which suggests while the outlook for the company is positive this is being priced into the stock too quickly. As evidence of this, Deutsche is well below others in the database in forecasting 2011 EPS of just US27c. 

JP Morgan sides with Deutsche Bank and also rates Boart Longyear as Neutral, arguing much of the operational upside potential has already been achieved by management. As well, JP Morgan sees better value elsewhere in the sector, preferring the likes of Ausdrill ((ASL)) and Transfield Services ((TSE)) among more directly comparable peers.

The FNArena database shows a consensus price target for Boart Longyear of $4.88, which implies upside of around 17% from current levels. Targets range from $4.40 to $5.27.
 

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- Campbell Brothers lifts earnings guidance at AGM
- Increase reflects strong lab testing volumes and benefits from recent acquisitions
- Valuation is an issue for some stockbrokers, but Macquarie upgrades to Outperform

By Chris Shaw

The laboratory services market remains strong if AGM commentary from Campbell Brothers ((CPB)) is any indication. Company management grabbed the opportunity to lift interim earnings guidance. Net profit for the first half is now expected to be in the range of $90-$95 million, which is comfortably above market estimates.

As an example, Deutsche Bank had been forecasting an interim profit of $84 million, while UBS had been expecting a result of around $88m. Estimates across the market have been lifted in accordance with the new earnings guidance.

JP Morgan has lifted its FY12 forecast by 5%, UBS by 6% and Deutsche Bank by 9%. Consensus earnings per share (EPS) forecasts according to the FNArena database now stand at 274.9c for FY12 and 316.8c for FY13, which compares to the 202.6c recorded in FY11 (the company has a financial year ending on March 31).

Two factors have contributed to the increase in earnings guidance according to Deutsche Bank. The first is high mineral sample volumes, which while probably near a peak, are likely to remain around current levels until a seasonal slowdown in December.

The second is the boost from recent acquisitions, as Deutsche notes the 1H12 result will include six months of contributions from Ammtec and three months from Stewart Group. The Stewart Group acquisition in particular should continue to boost earnings, as UBS points out the purchase has added a critical inspection and analysis business to the Campbell Brothers product offering.

UBS also suggests earnings have been boosted by the ongoing lab expansion program being undertaken by the company. On UBS estimates, return on capital employed in the lab capex program should exceed 100% in the first year.

A strong balance sheet implies further acquisitions are likely, something UBS suggests will provide ongoing support to both the quality and stability of earnings. Consensus earnings estimates imply a relatively strong earnings growth outlook in coming years (FY12 37.3% and FY13 16.5% on present consensus forecasts).

Along with increases in earnings estimates, brokers have lifted price targets, Macquarie pushing up its target to $50.58 from $46.45 and JP Morgan to $47.28 from $45.72. The consensus price target according to the database now stands at $49.11, up from $47.91.

Valuation remains an issue for some in the market, as despite increases to forecasts and targets, the likes of JP Morgan and Deutsche Bank continue to rate Campbell Brothers as a Hold. This reflects limited potential upside from current levels, particularly given recent share price strength.

UBS retains a Buy given its view strong earnings growth will support the share price, while post the AGM update Macquarie has upgraded to Outperform from Neutral. Macquarie offers a similar argument to UBS, suggesting earnings upgrades coming through support the current valuation and will see Campbell Brothers continue to trade at a substantial premium to the market.

Overall the FNArena database shows Campbell Brothers is rated Buy twice and Hold four times, suggesting the majority remains cautious about how much is already priced in and how much potential upside is left.

Shares in Campbell Brothers today are weaker and as at 11.15am the stock was down 19c at $46.96. Over the past year Campbell Brothers has traded in a range of $30.11 to $57.00, the current share price implying upside of around 3.5% to the consensus price target in the FNArena database.

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- Bradken announces two acquisitions
- Deals should boost earnings and product offering
- Stock upgraded to Buy by Credit Suisse and Deutsche Bank

By Chris Shaw

In May Bradken ((BKN)) announced a capital raising, one that was seen by brokers as dilutive to earnings in the absence of any associated acquisitions. This dilutionary impact has, in the view of Deutsche Bank, now been offset by the purchase of Norcast Wear Solutions and Australian and Overseas Alloys for a total of $222 million.

Both the companies being acquired manufacture and sell mining wear parts, management at Bradken expecting the combined purchases will add $28 million including synergies to EBITDA (earnings before interest, tax, depreciation and amortisation) in FY12.

The purchases also allow Bradken to combine its existing Liner unit to the Norcast operations. BA Merrill Lynch expects this will create for Bradken a global leading offering with around 40% market share.

Guidance from management is for EBITDA in FY12 of $245-$255 million, which Deutsche notes would represent growth of 25-30% from expected EBITDA of around $196 million this year. As BA-ML notes, the market had not recognised the benefits of lower debt rates, meaning its own forecasts and market estimates for FY12 in particular had been too low.

On the back of the acquisitions brokers across the market have lifted earnings estimates for Bradken, Deutsche lifting its earnings per share (EPS) forecasts by 18% in FY12 and by 10% in FY13. Forecasts now stand at 60c this year, 71c in FY12 and 79c in FY13.

Credit Suisse has lifted its forecasts by an average of 8% to 59.5c, 69.6c and 83.2c respectively, while consensus EPS forecasts according to the FNArena database now stand at 61.4c for FY11 and 68.4c for FY12.

Price targets have similarly been increased, UBS lifting its target to $10.15 from $9.15 and BA-ML to $10.00 from $9.14. The consensus price target according to the database is $9.62, up from $9.24 previously.

Credit Suisse takes the view the additional earnings being generated via Bradken's acquisitions will alleviate market concerns with respect to earnings risk for FY12. These risks stem from the ESCO business and rail margins.

This, plus revised earnings expectations implying average earnings growth of 15% through FY14, is enough for Credit Suisse to upgrade Bradken to an Outperform rating from Neutral previously. Deutsche has made a similar upgrade in the expectation Bradken will benefit from macro tailwinds.

Deutsche estimates Bradken is trading on an earnings multiple of 10.4 times in FY13. Others in the market agree as post the upgrades by Deutsche Bank and Credit Suisse, Bradken scores a perfect six-for-six Buy ratings.

Shares in Bradken today are higher and as at 10.50am the stock was up 39c or 4.7% at $8.64. Over the past year Bradken has traded in a range of $7.08 to $9.60, the current share price implying upside of around 16% to the consensus price target in the FNArena database. 

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