Tag Archives: Other Industrials

article 3 months old

Top Ten Weekly Recommendation, Target Price, Earning Forecast Changes

 By Chris Shaw

Total Buy recommendations on Australian equities have moved even higher this week, the FNArena database now showing nearly 52.5% of all ratings by the eight stockbrokers under daily coverage are Buys. The increase comes despite little sign of any improvement in the outlook for corporate earnings or the broader economy.

During the week there were 16 upgrades compared to just seven downgrades, which is a continuation of the recent trend and suggests the valuation argument remains favourable for many companies.

Orica ((ORI)) received an upgrade to a Buy rating given an improved balance sheet has the company in good financial shape and earnings growth suggests value. Westfield Retail ((WRT)) also saw an upgrade to Overweight from Underweight, the argument being the stock offers defensive earnings and there is scope for June 2011 NTA to surprise to the upside.

Seven Group Holdings ((SVW)) was also upgraded and saw increases in price target, this being the result of changes in analysts covering the stock. Valuation arguments support the upgrades to Kathmandu ((KMD)), Paladin ((PDN)), AGL Energy ((AGK)), CSL ((CSL)) and Sonic Health ((SHL)), while an improved outlook given a competitors strong quarterly result was behind the upgrade for Sims Group ((SGM)).

Among the downgrades are Cochlear ((COH)), this given the combination of a high multiple and a slowing in earnings growth expectations. Generally weak trading conditions or valuation issues are behind the downgrades for Macquarie Airports ((MAP)), Macquarie Group ((MQG)) and ResMed ((RMD)).

While MAp saw a ratings downgrade there was also an increase in price target, this reflecting the potential for a proposed asset swap involving the company to deliver a positive valuation result for shareholders.

Positive initiations of coverage on Austbrokers ((AUB)) and Lynas ((LYC)) saw increases in consensus price targets for the two stocks in the database, while Orica and Westfield Retail also enjoyed price target increases associated with the upgrades in ratings.

The consensus target for Boart Longyear ((BLY)) fell after an initiation of coverage added a target below the previous consensus, while Ten Network ((TEN)) similarly saw a cut in target given ongoing evidence of weakness in advertising markets.

With fresh eyes looking at Seven Group the company enjoyed the largest increase in earnings estimates during the week, while the likes of CSR ((CSR)), Spark Infrastructure ((SKI)) and SP Ausnet ((SPN)) also saw changes to estimates as did Lynas, MAp and McMillan Shakespeare ((MMS)).

Resource stock Energy Resources of Australia ((ERA)) and refiner Caltex ((CTX)) were hit with the largest cuts to earnings forecasts during the week, while others to see numbers lowered by around 4.0% or more were Macquarie Group, Rio Tinto ((RIO)) and Aquila Resources ((AQA)). More modest cuts were made to estimates for Tabcorp ((TAH)), Qantas ((QAN)), BHP Billiton ((BHP)), Atlas Iron ((AGO)) and Blackmores ((BKL)).

 

 

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 ORI 0.130 0.500 0.37% 8
2 WRT 0.710 1.000 0.29% 7
3 SVW 0.600 0.800 0.20% 5
4 KMD 0.800 1.000 0.20% 5
5 LYC 0.330 0.500 0.17% 4
6 SGM 0.430 0.570 0.14% 7
7 PDN 0.290 0.430 0.14% 7
8 AGK 0.750 0.880 0.13% 8
9 CSL 0.250 0.380 0.13% 8
10 SHL 0.500 0.630 0.13% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 MAP 0.830 0.670 - 0.16% 6
2 MQG 0.290 0.140 - 0.15% 7
3 RMD 0.630 0.500 - 0.13% 8
4 BLY 0.860 0.750 - 0.11% 8
5 COH - 0.250 - 0.290 - 0.04% 7
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AAX 3.336 3.545 6.26% 4
2 TAH 3.110 3.275 5.31% 8
3 SVW 9.710 9.940 2.37% 5
4 MAP 3.487 3.555 1.95% 6
5 ORI 28.104 28.441 1.20% 8
6 AUB 6.570 6.638 1.04% 4
7 KMD 2.133 2.153 0.94% 5
8 SHL 13.253 13.371 0.89% 8
9 LYC 2.383 2.400 0.71% 4
10 WRT 2.917 2.934 0.58% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 PDN 4.337 4.130 - 4.77% 7
2 MQG 39.666 38.094 - 3.96% 7
3 BLY 5.197 5.106 - 1.75% 8
4 TEN 1.319 1.306 - 0.99% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 SVW 70.380 75.220 4.80% 5
2 CSR 24.125 25.950 1.80% 8
3 SKI 7.950 8.588 0.60% 7
4 SPN 8.250 8.488 0.20% 8
5 MMS 61.420 61.647 0.20% 3
6 LYC - 2.200 - 1.975 0.20% 4
7 MAP 8.459 8.659 0.20% 6
8 CSL 177.263 177.388 0.10% 8
9 SEK 29.725 29.825 0.10% 8
10 NHF 12.175 12.275 0.10% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 ERA - 7.175 - 14.950 - 7.80% 8
2 CTX 114.550 108.050 - 6.50% 6
3 MQG 349.500 344.071 - 5.40% 7
4 RIO 1030.422 1026.386 - 4.00% 8
5 AQA - 4.050 - 7.750 - 3.70% 4
6 TAH 66.900 64.850 - 2.10% 8
7 QAN 18.950 17.150 - 1.80% 8
8 BHP 411.961 410.211 - 1.80% 8
9 AGO 23.886 22.771 - 1.10% 7
10 BKL 160.533 159.667 - 0.90% 3
 

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

Fleetwood On A Sustainable 7% Yield

- Rio Tinto entry reduces risks surrounding Searipple accommodation village
- Fleetwood also looking to expand recreational vehicle production
- Earnings profile flat through FY12, yield attractive
- Stockbroker Moelis retains a Hold rating


By Chris Shaw

Managed accommodation has been an important part of Fleetwood's ((FWD)) earnings, so the negotiations with Woodside ((WPL)) over the Searipple contract were regarded as important. As expected, Woodside cut the number of rooms it required but as stockbroker Moelis notes, the additional rooms are quickly being taken up.

Fleetwood has signed a deal with Rio Tinto ((RIO)) that will see the resources giant take up 350 rooms. The other positive, notes Moelis, is the Rio Tinto deal was at market pricing of $180-$210 per room, as much as 30-50% ahead of what Woodside is estimated to have paid in its deal.

Elsewhere, demand for modular accommodation is expected to be challenging near-term. Moelis suggests Queensland recovery efforts post the floods earlier this year will present the best potential for near-term spending activity in this division.

Recreational vehicles are the other major part of the Fleetwood product offering and Moelis notes this division continues to enjoy a strong recovery. To take advantage of this, Fleetwood management is planning to increase production to around 54 vehicles per week early in FY12 and to around 70 per week by the end of FY12.

Moelis views the key to the expansion as Fleetwood's ability to maintain margins, as competition for blue collar labour is increasing given demand from the resources sector. As a partial offset to these pressures, Fleetwood has increased the level of automation in the manufacturing process in recent years.

On the news of Rio Tinto taking some rooms at Searipple, Moelis makes no changes to earnings estimates, earnings per share (EPS) forecasts standing at 90.1c this year, 91.2c in FY12 and 105.3c in FY13. This suggests a rather "flat" year ahead in terms of earnings per share growth, but a double digit jump in FY13.

Others in the market have reacted in a similar fashion, as having previously lowered estimates to account for Woodside reducing its rooms at Searipple, JP Morgan has restored its earnings forecasts on news of Rio Tinto stepping in as a replacement.

JP Morgan expects EPS for Fleetwood of 89.1c this year, 90c in FY12 and 95.7c in FY13. Consensus forecasts according to the FNArena database stand at 88.8c this year and 91.1c in FY12.

There is some upside potential to the estimates of Moelis as its numbers don't assume any major resource village contract wins despite a number of possibilities in both the iron ore and LNG sectors. The high Australian dollar will make securing additional contracts more difficult according to Moelis, as it makes offshore outsourcing more attractive.

With Rio Tinto taking some rooms market uncertainty surrounding Searipple has been reduced in Moelis's view. Even so, the earnings profile for FY12 implies modest growth, which is likely to limit the potential for share price outperformance.

Moelis rates Fleetwood as a Hold, while pointing out the strong balance sheet and solid free cash flow generation will support the dividend yield of around 7%. The rating of Moelis is broadly in-line with brokers in the FNArena database, which shows three Holds and two Buys. 

The consensus price target according to the database is $12.63, which is well above the Moelis target of $11.50. Targets range from Credit Suisse at $11.10 to RBS Australia at $14.80.

Shares in Fleetwood today are slightly lower as at 11.30am, trading down 2c at $10.70. Over the past year Fleetwood has traded in a range of $9.01 to $14.25, the current share price implying upside of around 18% to the consensus price target in the FNArena database.

 

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article 3 months old

Fund Managers More Uncertain About Outlook

- Fund managers more uncertain about market outlook
- Defensive assets favoured over growth assets
- Managers still relatively bullish on Australian equities
- Australian dollar expected to fall in coming years


By Chris Shaw

Global equity markets weakened in the June quarter, Russell Investments attributing this to ongoing political tensions in the Middle East and North Africa, continued European sovereign debt concerns, inflationary pressures in emerging markets and signs of a mid-cycle slowdown in the US.

In Australia there was the additional concern tighter monetary policy in China would impact on demand for Australian resources, while the stronger Australian dollar was also seen as an issue with respect to earnings for a number of companies.

In response to the June quarter performance, Russell Investments has surveyed fund managers to see how they are responding to current market conditions and where they identify opportunities going forward.

According to Greg Liddell, Russell Investments' director of consulting and advisory services, the growth theme which had dominated recent quarterly surveys reversed during the June quarter as managers became more uncertain about the outlook for global growth.

This left managers more cautious with respect to where they invested. Importantly, Liddell notes most managers remain confident the global economic recovery will continue, even though it will be at a much slower pace.

This caution meant mangers now favour defensive assets over growth assets, Liddell noting there was a sharp fall in bullish sentiment towards international shares to 57% from 88% previously. This was met by increased bullish sentiment towards Australian bonds to 19% from 3% previously. Sentiment towards cash also rose to 26% from 16% in the previous survey.

Bullish sentiment remains slightly better towards Australian shares at 62%, down from 78%, a level Liddell notes is relatively high from a historical perspective. Australian equities also appear to offer value, the survey showing only 5% of managers viewing the market as overvalued at present. This compares to 55% regarding the Australian market as currently undervalued.

Manager sentiment towards the small cap part of the Australian market has turned more bearish in the June quarter, Liddell noting a third of managers now expect a reversal over the next year. By way of comparison, 14% of managers were bearish on the broader Australia market. 

Managers are turning more positive on Australian real estate investment trusts, Liddell pointing out bullish sentiment towards this sector rose to 29% from 23% previously. This likely reflects the defensive nature of the asset class.

Among the other sectors, sentiment towards materials stocks fell sharply, with only half the managers in the survey now seeing value in the sector. The more bearish outlook reflects concerns of slower global economic growth and ongoing monetary tightening in China.

Negative sentiment towards the energy sector also increased to 31% from 24% previously, this given expectations of moderating growth and high levels of volatility. Liddell notes bullish sentiment towards the industrials sector was flat at 46%.

Bullish sentiment towards financials fell in the June quarter to 42% from 56% previously, Liddell seeing this as a reflection of knock-on effects from renewed European sovereign debt issues. 

With the Reserve Bank of Australia (RBA) viewed as turning more hawkish on rates, Liddell noted 26% of managers are now bullish on the potential for further increases to the cash rate. Despite expectations of higher rates managers remain bearish on the Australian dollar, negative sentiment rising during the June quarter to 62% from 56% previously.

Given a question of what will the Australian dollar be worth in five years' time, Liddell notes the majority of managers expect the currency will fall to between US81-90c. Not one manager expects the dollar to be above US110c in 2016.

Liddell notes potential catalysts for a weakening in the Aussie dollar identified by managers surveyed are a potential slowdown in China, increased risk aversion and delays by the RBA in lifting rates due to weakness in the non-mining sectors of the economy.

While bullish sentiment towards Australian bonds has increased this remains the least favoured asset class for managers, as lower yields mean returns over the medium-term are likely to be poor. 

The Russell Investments survey covers results from 36 investment management firms in Australia, the June survey being the 26th edition of the quarterly survey.
 

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article 3 months old

Solid Earnings Outlook Keeps MACA Limited At Buy

- MACA guidance meets expectations despite disruptions
- DJ Carmichael sees MACA as well placed to further increase order book
- Buy rating retained by DJ Carmichael as MACA offers value at current levels
 

By Chris Shaw

MACA Limited ((MLD)) provides contract mining, civil earthworks, crushing, screening and material haulage solutions in the Western Australian market. While MACA has experienced some disruptions to operations in the June half, primarily due to wet weather, management last week guided to net profit for the year of $27-$30 million.

This is in-line with DJ Carmichael's forecast of $28.7 million, the broker noting MACA has managed to offset the difficult conditions to some extent by a continued focus on both efficient maintenance of its mining fleet and on corporate overheads.

Additional contract wins also helped, DJ Carmichael noting MACA has completed a Definitive Feasibility Study for Garden Well project of Regis Resources ((RRL)) and is well placed to services other projects being developed by Regis and WPG Resources ((WPG)).

On DJ Carmichael's numbers, work-in-hand for MACA now stands at $1.3 billion, which gives increased confidence in the broker's existing revenue forecast for FY12 of $330 million as this is better than 90% covered by current work-in-hand and extensions.

To reflect good visibility in MACA's order book, DJC has lifted revenue assumptions beyond FY12, with scope for further increases if additional contracts can be won. Current earnings per share (EPS) forecasts stand at 20.1c for FY11 and 22.9c for FY12. 

The stockbroker has a price target on MACA of $3.03, down slightly from $3.10 previously given recent market weakness and adjustments to earnings forecasts. Based on the revised target MACA is trading on an earnings multiple of 10.4 times in FY12, with recent share price resilience helping close a valuation gap to peers.

Given the attractive multiple on offer DJ Carmichael rates MACA as a Buy. Key catalysts for any re-rating of the share price should be contract extensions and new contract wins.

There is little to compare DJ Carmichael's view on MACA with the broader market, given a market capitalisation of just over $350 million at current levels.

Over the past year the shares have traded in a range of $1.40 to $2.96.

 

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article 3 months old

Hastie Comes In From The Cold

- Hastie announces a $160m raising
- Debt to be restructured
- Insolvency has been staved off
 

By Greg Peel

Mired in debt and suffering from a downturn in demand for its air conditioning installation and service business, Hastie Group ((HST)) has recently been hanging on for dear life. Once a $5 company, Hastie shares had recovered from a GFC level near $1 to be back over $2 early this year, but since then the slide has accelerated once more. A blow -out in working capital combined with the risk of debt covenant breaches had investors fearing the company's demise.

Hastie had been trying to put bandaids on its balance sheet up to now but what was really needed was something more decisive, and the market had begun to think maybe it would never happen. But it has, as last week Hastie announced a fully underwritten $160m capital raising at 14cps which would increase its share count by 240m to 1367m. Private equity firm Lazard will become a cornerstone investor with 16-21% of capital and will be hoping to repeat the success it had with recruitment company Chandler Macleod ((CMG)), suggests RBS. The investment will be escrowed for 12 months.

The money will be used to restructure debt and resolve Hastie's tenuous balance sheet issues. JP Morgan calculates an improvement in the company's net debt to net debt plus equity ratio to 11% from 43% and an increase in the interest cover ratio to 2.5x from 1.8x. It means that Hastie can now complete the work in its order book and not be excluded from work in its pipeline due to lack of funds.

It also means, importantly, that Hastie's suppliers and customers can relax, JP Morgan suggests. Suppliers had begun to insist on cash terms and customers were concerned existing jobs might not be completed – a recipe for a slippery slope into insolvency. With a new debt structure, demands on working capital should ease and customers relations improve, JPM believes.

It doesn't mean that the market in general for Hastie's services will suddenly improve however, so while JP Morgan and RBS have both upgraded their ratings they are both to the equivalent of Hold from Sell. 

It was last December when UBS upgraded Hastie to Buy from Hold after the initial stock price plunge, believing value had now emerged. UBS has been quiet ever since but has now reiterated Buy in the wake of the raising and on the belief that margins can stage a modest recovery over the next three years, leading to total compound earnings growth of 18.6%. UBS has been forced to trim its target nevertheless, from December's $1.40 to 21c.

JPM and RBS had trimmed their own targets previously, so with significant dilution now pending JPM has dropped to 21c from 24c and RBS moves to 17c from 20c. There are three other brokers in the FNArena database who are yet to update, so there's no point in taking the current 1/4/1 Buy/Hold/Sell ratio or 24c consensus target as indicative just yet.

It's only the beginning of Hastie's journey back, RBS suggests. It will take time to address working capital and internal controls and to restore confidence to suppliers, customers, and even staff. 

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article 3 months old

Higher Capex At Emeco Has Brokers Confident On Growth

- Emeco's earnings update slightly disappointing
- Planned increase in capex an offsetting positive
- Brokers sees value given expectations of solid earnings growth


By Chris Shaw

Resource equipment hire group Emeco Holdings ((EHL)) plans to accelerate growth in FY12, management yesterday announcing an increase in capital expenditure plans to help achieve this goal. The funds will be spend on new and used equipment.

Capex is now expected to total $165 million by the end of FY12. This amount is around 20% higher than BA Merrill Lynch had expected, leading to estimates it could add around 4% to earnings per share (EPS) in FY13.

The capex will target the core Australian and Canadian markets, something Credit Suisse expects will improve the sustainability of Emeco's earnings through the cycle. While there is some operational risk from a lack of customer contracts to date, Credit Suisse expects tight market conditions will keep equipment utilisation at solid levels.

The update on capex was accompanied by updated earnings guidance, which suggests net profit for FY11 will be between $55-$57 million. UBS had been forecasting a profit for the full year of $60 million, so its estimate for FY11 has been trimmed slightly.

The higher capex is a positive for earnings beyond the current year however, so UBS has lifted estimates for FY12 and FY13 by 4-8%. This reflects the expectation there will be strong demand for the additional equipment Emeco will deploy.

Credit Suisse has also adjusted forecasts, trimming earnings estimates by an average of 3% through FY13. The changes reflect both the revised capex plans and changes to factor in currency movements and adverse weather conditions.

Post the changes to forecasts across the market, consensus estimates for Emeco in EPS terms according to the FNArena database stand at 9c for FY11 and 11.6c for FY12.

There has been one change in rating on the back of Emeco's update, Credit Suisse upgrading to an Outperform from Neutral previously. The upgrade reflects both improved value following recent share price underperformance and improved forward visibility with respect to earnings. 

This improved visibility stems from lead time on equipment continuing to expand to 12 months or more and an average contract length in Australia of more than 18 months. As well, Credit Suisse notes Emeco's overseas operations are now primarily exposed to lower cost resource production markets. This is expected to deliver improved returns through the economic cycle.

UBS similarly rates Emeco as a Buy, expecting the company will be a beneficiary of a particularly strong operating environment given significant mining capex expectations in Australia. This should deliver strong earnings growth, meaning Emeco shares offer value at current levels on UBS's numbers.

There is no argument from BA-ML, which expects Emeco will improve profits as the capex spend will grow earnings ahead of costs. At a current earnings multiple of around nine times on BA-ML's numbers the market is not pricing in this potential, states the broker.

Overall, the FNArena shows Emeco is rated as Buy four times and Hold once, this courtesy of Deutsche Bank. The consensus price target is 1.26, which is little changed from prior to yesterday's update.

Shares in Emeco today are higher and as at 11.00am the stock was up 3c at $1.075. Over the past year Emeco has traded in a range of $0.505 to $1.27. The current share price implies upside of around 20% to the consensus price target in the FNArena database.

 

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article 3 months old

Brokers Jumping On Ausdrill

- Two brokers initiate coverage on Ausdrill
- Stock now rated a Buy by all four brokers providing coverage
- Value on offer thanks to solid earnings growth outlook and expansion potential

By Chris Shaw

With mining services companies continuing to attract attention the latest in the spotlight is Ausdrill ((ASL)).  JP Morgan and RBS Australia have initiated coverage with Buy ratings, bringing to four the number of brokers in the FNArena database covering Ausdrill, all of which have Buy ratings.

Ausdrill has a leading position in production and exploration drilling services and products, operating in both the Australian iron ore and African gold sectors. Around 55% of group earnings are generated from Australian contract mining services and 34% from African mining services, the balance coming from manufacturing and supply/logistics operations. 

RBS estimates Ausdrill generates 70% of revenues from the gold and iron ore sectors. While this is a concentration of operations, RBS points out both sectors have a solid demand outlook over the next 3-5 years.

Ausdrill's services include drill and blast, grade control, load and haul and large equipment hire. JP Morgan notes demand for Ausdrill's services is increasing, this a response to increasing gold and iron ore production, higher strip ratios and declining yields.

RBS Australia points out 65% of revenues come from customers at the production stage, while a similar percentage of revenues for FY12 are leveraged to tier-one mining companies. RBS sees this as giving Ausdrill a further buffer against any potential commodity price volatility.

On RBS's forecasts, Ausdrill is expected to grow revenues by 13-16% across FY12-FY13. This will be driven by recent contract wins and the potential for margin gains from a capacity-constrained operating environment.

JP Morgan's estimates are even higher, the broker forecasting earnings per share (EPS) growth of 20% in FY12 and 12% in FY13. This reflects a recent equity raising, which will allow for additional investment in new plant and equipment. JP Morgan expects this will give Ausdrill a competitive advantage in bidding for new work.

What should also support earnings growth in JP Morgan's view is the potential for bolt-on acquisitions, as the recent capital raising has strengthened Ausdrill's balance sheet. Any acquisitions should boost capabilities, JP Morgan suggesting areas such as open cut and underground mining services and drilling products may be target areas for management.

On JP Morgan's forecasts, Ausdrill should generate EPS of 26.6c this year and 32c in FY12, while RBS Australia's forecasts stand at 27.2c and 32c respectively. Consensus estimates according to the FNArena database are 26.8c this year and 31.4c for FY12.

RBS Australia suggests there is some upside risk to earnings, this from the potential for margins to grow beyond what is currently forecast. Margin upside could come from the renegotiation of legacy contracts and increased productivity in the labour-intensive African contract mining operations.

Ausdrill offers value at current levels, RBS Australia's figures implying a FY12 earnings multiple for the stock of 9.9 times. JP Morgan similarly views the stock as cheap, noting at current levels Ausdrill is trading at a discount to valuation of around 17%. 

Potential catalysts to close this valuation discount include meaningful new contract awards and scope increases, as well as delivery of earnings expectations.

JP Morgan's price target for Ausdrill is $4.17, while RBS has initiated with a target of $4.00. This brings the consensus price target according to the FNArena database to $3.99. 

Shares in Ausdrill today are slightly higher and as at 12.20pm the stock was up 2c at $3.21. Over the past year Ausdrill has traded in a range of $1.555 to $3.94. The current share price implies upside of almost 24% to the consensus price target in FNArena's database.
 

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article 3 months old

Bradken’s Upside Outweighs ESCO License Loss

- Bradken's recent capital raising has strengthens balance sheet
- Increased scope for bolt-on acquisitions
- Moelis sees value leading into an earnings growth acceleration post FY12


By Chris Shaw

At the end of last month Bradken ((BKN)) reiterated full year earnings guidance for a result in EBITDA (earnings before interest, tax, depreciation and amortisation) terms of $192-$200 million for FY11.

With guidance set, stockbroker Moelis suggests the key metric for any surprise in the result is cash flow. This is because management has indicated there is likely to be a spike in working capital in the second half attributable to an increase in rail sales with corresponding payments sliding into FY12.

Looking ahead, while management has indicated FY12 is likely to see a relatively flat result from the Mining Products division, Engineered Products should deliver growth of 20% in local currency terms. This sees Moelis forecasting earnings per share (EPS) of 60.4c in FY11 and 66.4c in FY12.

By way of comparison, consensus EPS forecasts according to the FNArena database stand at 61.2c and 64.5c for FY11 and FY12 respectively.

Moelis suggests there is some upside potential to these forecasts, as a recent share placement has left Bradken's gearing at only 28%. This will facilitate planned capex of $160 million in FY12, while also offering scope for bolt-on acquisitions.

On Moelis's numbers, Bradken has an estimated debt headroom of around $400 million that could be spent on acquisitions. While some acquisitions could be made in Australia, the stronger Australian dollar and a recovery in local demand is likely to see Bradken look to the US for possibilities.

There is some earnings uncertainty in FY12 from the ESCO licence expiry, but even allowing for this Moelis sees good value in the stock as earnings estimates imply an earnings multiple in FY12 of 12.1 times.

Growth in earnings is assumed to accelerate beyond FY12, adding weight to Moelis's Buy rating on Bradken. Others in the market are similarly positive, as the FNArena database shows four Buys and two Hold recommendations.

Another to rate Bradken as a Buy is BA Merrill Lynch, who post the recent placement was attracted to the fact the move gave the company greater financial flexibility with respect to acquisitions while also lowering financial risks given a strengthened balance sheet.

Credit Suisse downgraded to a Neutral rating from Outperform on the news, arguing if no acquisition is forthcoming the capital raising was an unnecessary dilution to earnings. Deutsche Bank similarly downgraded to a Neutral view, suggesting at share price levels post the capital raising the risk/reward for Bradken was simply not as favourable. (The share price has weakened since).

Moelis has a price target for Bradken of $9.50, while the consensus target according to the FNArena database stands at $9.25. Targets range from $8.60 to $10.00. Bradken's share price today is slightly lower and as at 11.45am the stock was down 8c at $7.93. 

Over the past year Bradken has traded in a range of $6.71 to $9.60, the current share price implying upside of around 16% to the consensus price target in the FNArena database.

Extra: for those readers paying attention to FNArena's Icarus Signal, see chart below for another classic example of the usefullness of the signal.

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article 3 months old

Risks At Imdex Remain To The Upside

- Imdex enjoying strong growth in Minerals division revenues
- Supports forecasts for solid earnings growth 
- Moelis rates Imdex a Buy, Deutsche Bank and BA-ML agree


By Chris Shaw

One of Imdex's ((IMD)) businesses is providing chemicals known as mud for drilling holes in the mining and energy sectors. Along with strong recent demand, Imdex has the added attraction of a low cost base for its operations in these sectors. 

As with the recent Campbell Brothers ((CPB)) full year result that showed strong revenue growth of about 55% in the Minerals division for the second half of FY11, Imdex has indicated revenue growth in its Minerals division was running at 54% for the third quarter of FY11.

For stockbroker Moelis, the recent market update indicates Imdex is at the least maintaining market share and pricing within what is a rapidly recovering global sector. For the full second half period Moelis expects Imdex will deliver revenue growth of 50%, a forecast the broker suggests may prove conservative given the strength of results in the third quarter.

This supports a Buy rating on Imdex, as the broker notes industry forecasts suggest a 70% increase in activity in the resources sector between 2010 and 2013. These forecasts, plus a significant backlog of capital raised by mining companies worldwide, should at least sustain spending in the coming year in Moelis's view.

Given a positive industry outlook Imdex should deliver solid earnings growth, Moelis forecasting earnings per share (EPS) of 16.3c this year and 19.9c in FY12. Consensus EPS forecasts according to the FNArena database stand at 14.5c and 20.5c respectively.

There remains upside risk to forecasts according to Moelis, as while management is targeting a 30% revenue contribution from the Oil and Gas division in coming years, the broker's expectations for this division remain considerably more conservative. This means if management can achieve its goals there is material scope for earnings to come in better than expected.

What could also drive earnings growth are acquisitions, as Moelis estimates Imdex had a gearing level of only 23% as at the end of the first half of FY11. This puts bolt-on acquisitions on the radar if management can find suitable targets.

While Imdex has enjoyed strong share price gains over the past year, having risen by 185% in that period, Moelis continues to see value. As the broker points out, its EPS forecasts imply earnings multiples of 12.7 times for FY11 and just 10.4 times for FY12.

Both Deutsche Bank and BA Merrill Lynch agree as both also rate Imdex as a Buy at current levels. Coverage of Imdex is limited given a market cap of around $430 million at current levels. 

Price targets among the three brokers are closely grouped, with Moelis and Deutsche setting targets of $2.50 and BA-ML a $2.43 target.

Over the past year Index has traded in a range of $0.67 to $2.27, the stock offering upside of 12.6% to the consensus price target in the FNArena database.
 

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article 3 months old

Bradken Capital Raising Triggers Downgrades

- Bradken surprises with capital raising
- Funds to be used for increased capex and possibly acquisitions
- Broker earnings forecasts and price targets trimmed
- Two ratings downgrades on the back of the raising


By Chris Shaw

Bradken ((BKN)) yesterday unveiled a $162 million capital raising and the opening of a share purchase plan, with the proceeds to be used to fund planned growth capex and increase flexibility for potential acquisition opportunities.

As Deutsche Bank notes, capex plans have increased and now stand at $150-$160 million for FY12, which compares to the broker's previous estimate of $85 million. Credit Suisse sees growth capex as significantly accretive for earnings longer-term, taking the view Bradken can achieve a three year cash payback on this capex spend.

On the flip side, Credit Suisse suggests in the absence of any acquisitions the capital raising was not necessary, as debt levels were well below covenant levels and management's targets. Post the raising Bradken is expected to have around $250 million in balance sheet headroom to remain within gearing target levels.

On the back of the capital raising, earnings forecasts for Bradken have been adjusted, most brokers trimming estimates from FY12 and beyond. Consensus earnings per share (EPS) estimates for Bradken according to the FNArena database now stand at 61.2c in FY11 and 65.4c in FY12.

Brokers have also adjusted price targets, the consensus target according to the database now standing at $9.31. This is down from $9.64 prior to the announcement of the capital raising. There is a reasonable spread in price targets, ranging from $8.60 for Deutsche Bank to $10.00 for UBS.

Both Credit Suisse and Deutsche Bank have downgraded Bradken to Hold ratings from Buy previously on news of the capital raising. With Bradken's share price gaining around 13% in May, Deutsche Bank takes the view while acquisitions offer potential upside, the risk/reward profile at current levels doesn't favour a Buy rating. 

This is particularly the case given increased execution risk from the higher planned capex. Credit Suisse's downgrade is a valuation call, as factoring in the capital raising sees a cut in valuation and price target to $9.35 from $9.90 previously. 

RBS Australia retains a Buy recommendation, pointing out management at Bradken does have a solid track record in both sourcing and integrating acquisitions. BA Merrill Lynch is also positive and retains a Buy rating, noting the capital raising adds to financial flexibility and reduces financial risk ahead of the increased capex program.

The FNArena database shows Bradken is rated as Buy four times and Hold twice. 

Shares in Bradken today are weaker as the market digests the equity raising and as at 10.45am the stock was down 39c or 4.5% at $8.26. Over the past year Bradken has traded in a range of $6.71 to $9.60. 

The current share price implies upside of around 8% to the consensus price target in the FNArena database.

 

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