Tag Archives: Other Industrials

article 3 months old

SmartGroup Looks Smart For 2016

-No material re-rating likely
-Regulatory risk low but exists
-Contracts successfully renewed
 

By Eva Brocklehurst

SmartGroup Corp ((SIQ)) is one of the largest salary packaging and novated leasing providers in Australia and is expanding into adjacent services, such as workforce management for the healthcare industry.

Brokers notes the company's strong position in a growing market and the type of relationship with clients that is typically sticky. Contracts are usually of five years duration and the company is growing the number of employees under management, with opportunities to increase penetration with the federal government and win new clients emanating from a strong position with the NSW health department.

The company recently acquired Health-e Workforce Solutions, tapping a large sector opportunity and providing cross-sell opportunities, in Credit Suisse's observation. The broker likes the stock for its earnings outlook and the potential inherent in each new client. SmartGroup has a capital-light business and no debt. Margins can increase from product mix, improved supplier fees or rebates, and increased online services which provide efficiencies.

Credit Suisse takes up coverage with an Outperform rating and $3.90 target. That said, despite an undemanding headline valuation, taking into account the regulatory risk in the sector and the recent share price appreciation, the broker does not envisage a material re-rating.

Regulatory risk involves specifically any changes to fringe benefits tax (FBT) treatment for not-for-profit organisations and/or novated leases, given the company's business is centred on services which are premised on FBT.

A novated lease is a vehicle lease agreement whereby the employer agrees to pay the lease payments out of pre-tax salary. Novated leases account for around 60% of the company’s salary packaging revenue and are the highest margin product. Credit Suisse is of the view that changes to existing FBT regulations are unlikely, given proposals were neither implemented nor widely supported in the past.

Reasons for the broker's confidence lie in the reduction in supply-side stimulus to the vehicle industry, meaning the federal government is unlikely to want to negatively affect the demand side, of which novated leasing is an important contributor.

Secondly, the industry has addressed some previous misconceptions regarding a typical user of novated leases. Most are in the government, education, teaching, police, and charity sectors, rather than being high net worth individuals buying luxury vehicles.

Still, brokers concede investors do need to be aware of the risk. Other risks include SmartGroup's high and growing portion of transaction revenue, driven by supplier rebates/commissions on novated leases, and increased competition.

Fleet providers such as SG Fleet ((SGF)) are increasing their focus on novated leasing. Still, Credit Suisse notes new players are not entering the industry as there are increasing barriers in terms of scale and the capability required to deal with large clients.

A strong 2015 result is expected, amid organic growth and margin expansion. Margins increased to 37.4% at the first half result versus 33.9% for 2014, driven in part by revenue growth and operating leverage but also, as Credit Suisse observes, by negotiating better outcomes with suppliers. The broker cites the fairly recent prospectus – the company listed on ASX 18 months ago - and the fact the industry is now better understood as supporting the outlook.

A well documented risk at the time of IPO was that a material portion of contracts were up for renewal in 2015 and these have all successfully been retained. At the time of the first half results Macquarie noted the Department of Defence salary packaging contract was the largest contributor to revenue, and had been renewed. The broker expects 2016 revenue growth of 17.5% and envisages plenty of long-term growth opportunities.

One meaningful contract is up for renewal in the first half of 2016 accounting for 5.0% of revenue but Credit Suisse expects this client offers no change or, indeed, upside risk. No further material renewals are on the cards until 2017.

The stock trades in line with the median price/earnings of comparable stocks but is more expensive than its peer McMillan Shakespeare ((MMS)), Credit Suisse concludes. There are three Buy ratings on FNArena's database with a consensus target of $3.22, suggesting 14.5% downside to the last share price. The dividend yield on 2015 and 2016 estimates is 4.2% and 4.5% respectively.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Quickstep Set For Take Off

- Strike fighter demand set to surge
- Further opportunities to be exploited
- Cashed up and ready


By Greg Peel

FNArena first introduced readers to Quickstep Holdings ((QHL)) back in 2009 and last updated the company’s outlook in May, 2013 [Quickstep, And The New Frontier Of Composites]. The company was originally based in Fremantle but has since relocated to Bankstown in Sydney.

Quickstep fabricates carbon fibre composite panels via a proprietary rapid-cure system and supplies the aero, defence and automotive industries. The company’s longstanding customer, offering significant potential, is Northrop Grumann/BAE Systems, manufacturer of the F-35 Joint Strike Fighter military jet. Back in 2013, the JSF program was under a cloud of US defence cutbacks. Several countries were nevertheless ready to place orders for the jet.

Fast forward to today, and WA stockbroker State One suggests JSF parts production is set to take off on the back of a tripling of demand over the next four years. The broker forecasts 55% compound annual growth in demand between FY15 and FY19, resulting in a revenue increase for Quickstep to $123m in FY19 from $40m in FY15. Forecast earnings rise to $19m from breakeven.

Aside from the JSF, Quickstep also fabricates parts for Lockheed Martin’s C-130J military transport aircraft and has recently won its first automotive contract, for the fabrication of parts for the Australian army’s Hawkei military vehicle. The company is also targeting the commercial vehicle market and is in the process of expanding its Geelong production facility.

All of which costs money. To that end, Quickstep recently raised $22m in new capital, some of which will be used to pay down debt. The balance will be used to develop new business opportunities in the military and commercial aerospace and automotive industries, and to accelerate the development and commercialisation of in-house technologies.

With a recapitalised balance sheet, State One believes Quickstep is well positioned to take advantage of an “exciting” 4-5 year growth path. The broker rates the stock Buy (High Risk) and has set a 28c target. That target assumes an FY17 average Aussie dollar exchange rate of US80c from FY17 (Quickstep sales are in USD). That target would rise to 38c if US70c were assumed.

State One further notes it has not factored in any “blue sky” potential in that valuation. Quickstep is actively targeting the commercial light aircraft, unmanned aircraft (drones) and sports aircraft markets in the US, Europe and Asia (including China). Further opportunities also lie with existing relationships, given, for example, the Australian government has expressed interest in Northrop Grumann’s Triton military drone.

Moelis & Company is another stockbroker interested in Quickstep’s post capital raising growth trajectory. The broker has initiated coverage of the stock with a Buy rating and 21c target, representing 31% total shareholder return over the next twelve months (on an Aussie of US72c).

Moelis believes Quickstep is now at a turning point, with sufficient capital to fund growth capex and fulfil its existing order book volumes (A$130m firm over the next three years) and to further commercialise the company’s proprietary carbon fibre curing process. The medium term risk/reward outlook for investors is favourable, the broker suggests, notwithstanding execution risk.


Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

UK Blow Injures Confidence In Slater & Gordon

-Heightened FY17 financial risk
-Uncertainty clouds outlook
-Little balance sheet flexibility
 

By Eva Brocklehurst

Investors now require the patience of Job when it comes to law firm Slater & Gordon ((SGH)). The lawyer group has been dealt a blow from the direction of the UK, with the government there outlining a proposal to reduce claims for minor injuries from road traffic accidents.

Changes will only be made next year following a consultation process but, brokers maintain, the UK government's intentions are clear and, if implemented, would be a major negative for the company's earnings.

The sudden announcement – altogether unforeseen by Slater & Gordon - came as a jolt to brokers, given they were already concerned about difficulties being faced by the company in absorbing its large UK acquisitions. The broking community is also awaiting the outcome of a review by the Australian Securities and Investments Commission (ASIC) to ensure there are no further accounting issues to waylay the firm.

FNArena's database has no Buy ratings where previously there were three. There are now three Hold and one Sell. The consensus target has fallen to $1.14, suggesting 34.6% upside to the last share price, and compares with $4.01 previously. The dividend yield on FY16 forecasts is 11.2% and 12.4% on FY17, but brokers are not yet confirming earnings cuts prior to confirmation. In other words, such yields are not fixed.

Macquarie believes the proposals are a deliberate attempt to reduce cash compensation for minor soft tissue injuries. The two main proposals are to remove the right to general damages for minor soft tissue injuries and increase the small claims limit for personal injury to GBP5,000 from GBP1,000, transferring the claims to the Small Claims Court. No impact is expected on FY16 but in FY17, brokers expect UK case volumes are at risk.

Macquarie notes the acquisition of Quindell's PSD division, now Slater & Gordon Solutions (SGS), has significantly increased the firm's exposure to a low value, lower margin, high volume case load. Moreover, with over $650m in debt, the balance sheet does not afford the flexibility to withstand a significant earnings hit.

The broker makes no changes to forecasts at this point, conceding earnings visibility is low given the uncertainty. Nevertheless, with further downside if the reforms are implemented and until the issues are resolved, Macquarie reduces its target to $1.00 from $4.59 and downgrades to Underperform from Outperform.

Deutsche Bank also greets the news with alarm, reducing its rating to Hold from Buy. Target is lowered to $1.65 from $3.35. Despite the re-affirmation of FY16 earnings guidance, there is significant risk to FY17 and beyond, and the broker's bear case scenario envisages a 21% fall in FY17 earnings.

Deutsche Bank does point out that these proposed regulatory changes have been put forward and withdrawn before, most recently in November 2013. The main barrier to implementation has been the ability of the Small Claims Court to handle the expected increase in the volume of road traffic accident injury cases.

UBS reduces its target to 90c from $2.80 and retains a Neutral rating. The broker assesses the SGS exposure to such road traffic accident cases represent 90% of its business. FY17-18 earnings estimates are reduced by 44%.

Moving to Hold from Add, Morgans acknowledges the financial risk profile has become elevated to the extent it cannot continue to recommend buying the stock. The broker accepts the company has proven it can adapt and benefit from regulatory changes over the years, but debt and the overhang of the ASIC review are of concern.

The broker maintains forecasts at this juncture but changes its valuation methodology because of the uncertainty over future earnings. This means the target is lowered to $1.33 from $5.31.

See also, Patience Required For Slater & Gordon on November 24, 2015 (noting the UK bombshell was yet to be dropped at publication).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Patience Required For Slater & Gordon

-Stronger skew to second half cash flow
-ASIC review overhang ongoing
-Will first half dividend be suspended?
 

By Eva Brocklehurst

Confidence is slow to re-build in law firm Slater & Gordon ((SGH)), with the AGM update suggesting that some of the more meaty challenges in the UK Slater and Gordon Solutions business are taking longer to resolve.

Deutsche Bank received mixed signals from the AGM briefing. The start to FY16 in the UK has been notably soft, featuring staff integration issues as the Manchester office is consolidated and new practice software installed. Resolution rates across personal injuries law have also been slower with the introduction of Medco earlier this year.

This increases the skew in earnings to the second half and puts a shadow over the company's ability to meet its guidance, at least in the UK, the broker contends. Group FY16 cash earnings guidance has been re-affirmed, with forecasts for group fees to be over $1.15bn.

Valuation grounds compel Deutsche Bank to retain a Buy rating, but the broker expects the share price to remain under pressure while the company restores investor confidence.

The company has reduced case intake expectations, which translates to a negative net movement in work in progress in the UK of GBP20m. Hence, Morgans downgrades earnings forecasts by 14%. The broker notes the company is still under an ASIC (Australian Securities and Investments Commission) review and therefore a meaningful share price re-rating is unlikely until the investigation is concluded.

Morgans highlights the company's decision to take quality cases rather than quantity and an intention to bring intake and resolution levels into closer alignment. The broker believes this decision is important, as it will not only balance cash flow but also the mix of cases on its files. Still, the extent of the fall in case intake in the near term has more to do with cash-flow management than ensuring quality cases, the broker contends.

Morgans believes the stock has deep value and patient investors will be rewarded but accepts that the uncertainty surrounding accounting issues needs to be removed and Slater and Gordon Solutions (SGS, formerly Quindell's PSD) needs to demonstrate not only profits but also cash flow.

Given the hefty skew to the second half the broker expects the market will remain sceptical of the company’s ability to meet expectations and continue to question the servicing of its debt requirements. Morgans remains optimistic that ASIC will sign of on the accounts but suspects this review could take until April next year.

The Australian lawyers branch is performing well and one of the highlights, Macquarie observes. Operations are on track to meet performance targets in this realm but the turnaround in the UK acquisition is taking longer to achieve and the SGS business is disappointing, the broker maintains, negatively affected by weaker settlement rates.

That said, Macquarie notes management remains convinced about the strategic merit of this business and acknowledges the progress being made in repairing relationships with counterparties, including insurers, and suppliers of business.

The company has completed a review of Noise Induced Hearing Loss (NIHL) cases it acquired and has structured a new profit sharing arrangement with the vendors. The company expects 40-50% of cases should be settled. Macquarie suspects these cases will result in material earnings and operating cash inflow in FY16 and FY17 but there will be a moratorium on new cases while the existing book is run down.

The broker also suspects management may delay the interim dividend in February and, if FY16 targets are achieved for operating cash flow of $205m, then reinstate it for the full year.

UBS also queries the ability to meet FY16 guidance, given the conditions in the UK point to a weak first half. The primary reason has been the changes in the Fast Track Road Traffic Accident practice which has resulted in lower case volumes.

The company faces a number of hurdles and delivering on guidance is required to justify its accrual accounting policies, in the broker’s opinion. If second half cash flow falls substantially below guidance the market will intensify its focus on net debt. Hence, UBS does not expect the the stock to outperform and retains a Neutral rating.

In sum, FNArena's database has three Buy ratings and one Hold (UBS). The consensus target is $4.01, suggesting 97.7% upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 4.7% and 5.7% respectively. Targets range from $2.80 (UBS) to $5.31 (Morgans).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Programmed Maintenance Has The Skills

- Property & Infrastructure, Workforce strong
- Resources, Marine weak
- Merger synergies substantial
- Value undemanding
 

By Greg Peel

Programmed Maintenance offers maintenance, facility management and workforce services across the property and infrastructure and resources sectors. The company’s first half earnings result provides a snapshot of the current state of the Australian economy.

As investment and services spending in the mining and energy sectors continues to wind down, Programmed’s two divisions of Resources and Marine are struggling. Marine, which provides services for the offshore oil & gas industry, has been particularly hard hit. In this specific field, specialist peer MMA Offshore ((MRM)) is also finding its business rapidly declining as construction of the big Western Australian LNG projects reaches a conclusion.

On the flipside, property is leading the Australian economic transition and unemployment is falling. Infrastructure is quietly ramping up, with a promise of much more to come in over the next two years as state and federal governments pursue new construction. Programmed’s two divisions of Property & Infrastructure and Workforce are therefore performing well, to the point the group was able to net a 5.8% increase in profit over the previous first half.

As a standalone story, Programmed Maintenance would not be a stock offering a lot of net excitement in the foreseeable future, throughout the Australian economic transition. However the story becomes more interesting when we note that subsequent to the close of books on the first half, Programmed completed a merger with previous rival Skilled Group.

The bad news is that look-alike Skilled offers a similar balance, being big in maintenance and workforce but also bringing further exposure to offshore marine. The good news is there is substantial capacity for synergy gains within the merged entity. As to whether those synergies are enough to counter the ongoing struggle the company will face in Resources and Marine, at least in the near term, is the question brokers are asking.

Management admitted at the result release that the outlook for Marine is very weak. But it was noted that synergies are already tracking ahead of schedule for the group. Marine is nevertheless the sticking point for Credit Suisse. Until there is some earnings visibility in this sector the broker prefers to keep its powder dry on the investment front, and has downgraded its recommendation to Neutral from Outperform.

JP Morgan retains a Neutral rating, believing that gains from synergies will simply be offset by ongoing weakness in Marine.

Other brokers are, however, more upbeat about the value on offer.

Deutsche Bank sees a strong trajectory for Property & Infrastructure heading into FY17, offering sufficient growth to offset weakness in Resources. Marine’s tale of woe is of little surprise but the broker is encouraged by a pick-up in revenue in the first half for Workforce, which is a key positive.

Deutsche believes value is undemanding at the current price and maintains a Buy rating. UBS, similarly, believes that on a medium term basis the stock is cheap. UBS retains Buy.

Macquarie had been advising on the merger and thus had been on research restriction, but on completion is now back to reinstate an Outperform rating. The combination of Programmed and Skilled provides enhanced scale and diversification as well as significant synergies over time, the broker suggests, which will more than offset weakness in Marine.

The stock is trading at a 30% discount to the Small Industrials, Macquarie calculates, and thus value is undemanding.

All up the FNArena broker database is split between three Buy or equivalent ratings and three Hold. A consensus target price of $3.05 suggests 13% upside. On broker forecasts, the stock offers a 6.9% yield in FY16 and 7.3% in FY17.


Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Is The End Of The Downside In Sight For Orica?

-Commodity prices need to hold up
-Supply rationalisation still likely
-Brokers welcome more transparency


By Eva Brocklehurst

Orica ((ORI)) is making the best of the current environment, daring to make a more positive assessment of FY16, based on commodity prices holding up. The company's FY15 result revealed net profit was down 26%, at the low end of the guidance range.

This new found optimism has not convinced Morgan Stanley. The broker is not sure that FY15 represents a trough in earnings for Orica. Bulk commodity exposures, particularly coal in Australia, Indonesia and North America, are expected to endure further rationalisation of supply in the short to medium term. This will place more pressure on the company's ammonium nitrate/emulsion volumes and, importantly, on plant utilisation.

Morgan Stanley notes there is no contractual protection against this downside and, in light of the fixed costs at AN plants, any reduction in volume could affect profitability. In the short term, the company has the challenge of loading the Burrup (Western Australia) and Bontang (Indonesia) plants adequately. The broker also notes that, in FY17, if demand continues to weaken plants will be under pressure given the current high utilisation levels.

This is particularly the case in Western Australia where the company's Burrup plant competes with Kwinana, and in North America where demand is moving to a flat part of the cost curve, to gas rather than ammonia-backed supply. In such a structurally declining demand environment the broker finds it hard to put a floor under valuation.

UBS is inclined to a view that while raising FY16 earnings estimates by 6.0% to account for a better run rate on cost cutting, the outlook for explosives, particularly in Australia, is subdued. The broker highlights the sharp contraction in underlying margins in FY15, because of a shift in mix and weaker prices.

UBS forecasts imply flat 3-year average earnings growth - just 1.0% - off a FY16-19 base. Moreover, this outlook relies on the sustainable delivery of cost reductions. Hence, risks are to the downside and, at the current share price, the broker believes the valuation is full.

Deutsche Bank found the FY15 results positive, in that net operating cash flow was stronger than expected and net debt lower than expected. The broker takes heart in the improved outlook and believes the company's indications for FY16 suggest earnings of $770m, with some conservatism built in as Deutsche Bank suspects FX benefits will be more supportive.

The broker observes the company's contracting position is improving, with 88% contracted in Australia in FY16 and 76% in North America. This provides confidence in relation to its volume and pricing guidance. The company is also more positive on the Indonesian market, given a reduction in Chinese AN imports following the recent incidents in Tianjin and the lower ammonia price.

In August the company announced it was accelerating its transformation program, targeting FY15 gross benefits of $170m, hence one-off costs were likely to be higher than previously forecast. At the FY15 result the company announced it had achieved $175m in gross benefit, with a cost of $81m relating to restructuring and redundancies.

Orica indicated it expected the transformation benefits to be sustainable at around 80% over the long run. In FY16 a further $50-60m in net transformation benefits is forecast, but JP Morgan suspects further pricing impacts and inflation pressures will temper this.

JP Morgan is cautious, given the considerable uncertainty regarding the ramp-up at Burrup and the future of Bontang. As well, Macquarie, while liking the more new transparent approach from management, believes the pressing issue is whether earnings have found their nadir.

The broker's wisdom gained from experience in the mining services/contractors sector is that downturns are usually longer and deeper than widely expected. Orica may be a high quality business but the macro environment remains very challenging across thermal coal, gold and copper, in Macquarie's opinion.

If anything, the report builds confidence, Citi contends. The broker accepts FY16 will have its challenges but believes there is enough evidence that FY15 could be the bottom of the current cycle. Citi likes management's new, more transparent style of disclosure... and then there is the dividend yield.

Morgans also lauds new management for changing the operating model and expects the commentary will be well received. Still, the broker concedes the outlook is not without risk. Morgans also highlights the benefit of a falling Australian dollar, although reduces profit forecasts because of higher interest and tax estimates.

Profit growth is expected to resume in FY17 as volume growth returns to the Australian market, with the broker observing miners can only prioritise high grades for so long. The share price may be supported by an attractive dividend yield but, nonetheless,Morgans is cautious and retains a Hold rating.

FNArena's database is evenly spread, with two Buy ratings, three Hold and three Sell. The consensus target is $16.82, signalling 2.9% upside to the last share price. Targets range from $13.47 (Morgan Stanley) to $23.50 (Deutsche Bank). The dividend yield on FY16 and FY17 forecasts is 5.8% and 5.9% respectively.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Sims’ Warning Shocks Brokers

-Medium term under scrutiny
-Lack of short-term catalysts
-Well placed for eventual turnaround
 

By Eva Brocklehurst

The going appears to be getting even tougher for Sims Metal Management ((SGM)). The company has issued a warning for first half earnings to only break even, also announcing a $230m write down at the AGM. The company expects earnings to return to FY15 levels by the end of FY16.

The AGM address was used to significantly re-base guidance to account for a materially weaker earnings outlook, Credit Suisse observes. This not only represents a material downgrade from just three months ago but also triggers alarm bells for brokers.

The severity of the downgrade is one such alarm, in Credit Suisse's view, as management appears to have been caught on the hop. While there is no denying declines in scrap prices exceeded expectations, the broker points out that evidence of the weak market was readily available at the results in August, when the company reiterated its guidance and earnings targets.

Moreover, Credit Suisse is frustrated by the lack of detail in this update, with the blame for the downgrade seemingly being attributed to the decline in ferrous prices, despite non-ferrous prices also being weak. What has occurred so far in FY16 is a large drop in ferrous prices and volumes to what the company calls "the new norm".

No comment was made about divisional or geographic performance. The broker's cautious outlook is based on the difficulty of identifying where a scrap recovery will come from in the near term.

JP Morgan now believes the medium term will come under scrutiny, especially as management did not reiterate its earnings target of $321m by FY18.  Management this time has opted to refer to making an acceptable return on capital. JP Morgan calculates this to mean earnings in FY18 will be more like $200m. The broker reduces its earnings estimates by an average of 51% for the next three years.

In the absence of scrap price appreciation or any other near-term catalysts, JP Morgan downgrades to Neutral from Overweight. Target is lowered to $8.65 from $11.90. Citi has followed suit with a downgrade to Neutral from Buy, and a target cut to $8.30 from $12.20.

Other brokers have also severely trimmed targets on the news. Macquarie observes the significant reduction in intake volumes on the back of sharp falls in scrap prices was expected to some extent, but the impact on Sims Metal has been worse than expected. In the current environment Macquarie believes the company's strong balance sheet and network are key differentiators and as 2016 gets underway its outlook should improve, aided by better conditions in the US market.

Feedback from the ground suggests to Macquarie that many US traders are choosing to retain full yards as they await better markets.The main challenges in that regard the broker foresees is that export markets from the US will depend on the displacement of Chinese exports of steel. There would be a benefit to scrap dynamics if this supply was curtailed in any way but the broker is not confident enough to factor this into its base case.

A more positive aspect of low prices for Sims is that small players have no incentive to collect scrap and larger players are better placed to offer services to large industrial scrap suppliers. Macquarie is content to retain an Outperform rating while lowering its target to $8.90 from $12.60. Deutsche Bank believes the negatives are factored into the current share price and, despite the disappointing downgrade, sticks with a Buy rating.

Deutsche finds some evidence of delivery on improvements in operations but does not believe this is the last of the asset write downs and more might come from the central region of the US. The closure of some of the facilities in this region makes sense to the broker as the company should be focused on the more profitable export markets.

The forecast bottoming of the iron ore price at US$45/t implies a scrap price of US$153/t, the broker calculates. Historically, Deutsche Bank highlights the correlation between iron ore and scrap prices is 92%.

UBS understands that two facilities in Chicago have already been shut in with restructuring to be completed by June next year. The company expects after its latest restructuring initiatives it will finish FY16 at an annualised earnings run rate equivalent to FY15. This implies earnings of $240m, in UBS' calculation. The broker's FY18 estimates are more around $145m, which assumes no improvement in scrap volumes or ferrous prices over the next two years.

UBS finds little visibility in the future earnings capacity of the company, given the tough conditions, but retains a Buy rating on the basis that Sims Metal is net cash and well placed for an eventual cyclical turnaround in earnings.

Morgan Stanley notes that the central American region remains the most challenged and likely driver of the downgrade. The broker expects this is the area where the majority of closures and write-downs are occurring. As management is now talking about an acceptable return on capital rather than a FY18 earnings target, on the revised asset base, Morgan Stanley calculates this equates to a 15% downgrade to consensus expectations.

The broker expects any improvement in demand or supply side metrics should drive out-performance and, should scrap prices stabilise in the next few months, supply side weakness may ease.

Ahead of the announcement the consensus target on FNArena's database was $11.97. It is now $8.91, suggesting 25% upside to the last share price. Targets range from $8.36 (Deutsche Bank) to $10.45 (Morgan Stanley). There are five Buy ratings and two Hold.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Pressure Continues On MMA Offshore

-Poor visibility on customer capex plans
-Questions over debt covenants
-Production support underpins long term
 

By Eva Brocklehurst

The pressure continues on marine services business, MMA Offshore ((MRM)).  The company has confirmed brokers' worst fears with a further downgrade to the FY16 outlook at its AGM, guiding to earnings of $75-85m, well below the $221m achieved in FY15.

Visibility regarding customer expenditure plans remains poor as a low oil prices put pressure on day rates and margins are squeezed, Morgans observes. The broker believes, as a number of high volume contracts roll off in the second half, the balance sheet is coming under renewed stress.

These contracts include services to Technip for the Wheatstone LNG project and the high-revenue Silja Europa accommodation vessel for Gorgon. While the company has been awarded a new contract by Woodside Petroleum ((WPL)) for three vessels to support production at the North West Shelf, Pluto and AusOil assets, Morgans does not believe this will be enough to lift the company's domestic utilisation rates meaningfully from the current 61%.

The company has not disclosed specific metrics around covenants but Morgans suspects that while MMA Offshore is trading within its banking covenants currently, further earnings deterioration without asset sales to reduce debt could instigate a breach.

The company has flagged $22m in asset sales but this figure has not changed since August and, therefore, does not provide the broker with much confidence. Rating is downgraded to Reduce from Hold.

Deutsche Bank agrees margins are being affected and contracts fiercely contested in the current environment. At the mid point of the new guidance, this represents a downgrade of 31% to prior estimates. The broker also notes the high gearing but expects this to fall sharply over FY17 as substantial new vessel capital expenditure is wound up.

Morgan Stanley goes against the grain, believing there is medium-term value given the company's asset backing. The broker cites the award of the $50m project from Woodside as a sign the company can still secure important long-term contracts. The assets sales are also expected to provide some relief.

Morgan Stanley also understands the company is working on a number of actions to reduce debt levels, potentially increasing the net debt to earnings covenant to levels similar to its US counterparts.

The broker acknowledges end markets have deteriorated to a greater extent and at a faster rate than previously envisaged but considers the company remains reasonably well positioned, with known capex needs and sustaining cash flow.

While accepting that the market will have little conviction in the earnings profile and continue to question the underpinning assets, given the outlook for the oil & gas services industry, Morgan Stanley remains content with an Overweight rating. The capital investment the company is making in FY16 underpins the broker's FY17 forecasts and a stronger medium-term outlook.

Macquarie is Neutral on the stock. The downgrade to forecasts is large and the fall in the oil price does not help the medium-term outlook. The broker's FY16 earnings forecast is 36% of FY15 and 53% of its prior forecast.

Beyond FY15 Macquarie expects that, as the Western Australian LNG project spending declines, the company's Australian earnings and revenue will decline too. That said, MMA Offshore's revenue will probably hold up better than the decline in production capex indicates because of its high level of long-term production support services.

All the above four brokers, including the more positive Morgan Stanley, have reduced dividend forecasts for FY16 to nil. On FY17 Deutsche Bank is the one retaining a 2c forecast.

FNArena's database has two Buy ratings, three Hold and one Sell for MMA Offshore. Two brokers included in that range - one Buy, one Hold - are yet to update on this latest guidance. The consensus target is 41c, suggesting 72.3% upside to the last share price. This compares with 59c ahead of the update.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Will Transpacific’s Restructure Spark M&A Interest?

-Execution key to benefits
-Trading environment still weak
-Better placed for M&A?
 

By Eva Brocklehurst

Transpacific Industries ((TPI)) will undergo an organisational restructure with CEO Vik Bansal targeting $30m in cost cutting benefits. The company will reduce its two customer-facing brands to one, Cleanaway, to reduce duplication.

Brokers observe a clear intent on the part of the new CEO to grow the business in terms of profit and dividends, with a new operating model and containment of capital expenditure. Cost reductions will include administration and comprise both labour and non-labour. Savings will be re-invested into further improvements in systems and defending and growing market share.

Execution is the key. UBS highlights the restructuring mode that has been in place for several years, with various strategies being employed by several CEOs. As a result, the broker wonders whether it will work this time. Management continues to face macro headwinds and challenging operating conditions but UBS acknowledges there is some ground work that has been put in place by previous efforts.

All else being equal, a $30m uplift to FY18 earnings would translate into a 28% increase to estimates and put the stock on a FY18 price/earnings ratio of 11, the broker calculates. UBS has a Buy rating on the basis that earnings expectations are low and the stock is cheap relative to international peers.

Moreover, with a sound balance sheet, re-based earnings and low expectations, there is upside potential from an M&A perspective, the broker contends. International competitors or private equity could manifest interest and, in such a scenario, UBS applies a 30% take over premium to its price target of 83c which implies fair value at $1.04.

The downside is that there remains short-term earnings risk from broad economic weakness and, if earnings declined 10% from the broker's current FY16 estimates, the stock could de-rate and result in fair value potentially falling to 31c.

Deutsche Bank views the catalysts as revenue growth from new sales initiatives and cash flow coming in over and above the landfill remediation provision. The broker continues to expect FY16 earnings of $267m, comprising 2.0% organic growth, $22m incremental benefit from acquisitions and a $9m benefit from one-off cost reductions.

The new strategy is credible, in Macquarie's opinion, and FY16 trading conditions are considered consistent with FY15. The balance sheet is strong and, while debt levels were lower than expected in FY15, this situation should rebound in FY16, the broker maintains.

Morgans highlights the record of false starts of corporate reform and so, until there is evidence, remains cautious. The broker notes the company provided no indication on the up-front cost of achieving the cost cutting benefits and does not expected the improvements will be noticeable until FY17, as the company intends to reinvest the gains in the current year.

The company also reported no improvement in trading conditions, although it expects to increase earnings in FY16. Landfill and remediation continue to use up a substantial amount of capital, Morgans observes. The broker retains a Hold rating.

FNArena's database has three Buy ratings and three Hold, with two of the brokers yet to update on the latest announcement. The consensus target is 78c, suggesting 14.5% upside to the last share price. Targets range from 71c (Morgans) to 83c (UBS).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Upside For G8 Education


Bottom Line 27/10/15

Daily Trend: Up
Weekly Trend: Down
Monthly Trend: Down
Support levels: $2.86 / $2.78 / $2.40
Resistance levels: $3.08 / $3.64 / $4.15

Technical Discussion

G8 Education ((GEM)) provides childcare services and has been focusing on acquiring competition over recent years. In 2013 the company acquired Mary Poppins and Peppercorn as well as almost 30 other child care and education centres.  In March the company announced it had completed the acquisition of several companies which formed part of the Sterling Early Education group. For the six months ending the 30th of June 2015 revenues increased 63% to A$305.7M. Net income increased 73% to A$28.2M. Revenues reveal an Australia segment increase of 68% to A$304.8M.  Broker consensus is “Buy”. Dividend yield is currently 6.3%.
 
Reasons to remain bullish longer term:
→ There is still room to grow via acquisitions.
→ Regulatory uncertainty has eased due to the Prime Minister’s recent comments.
→ 20 child care centres costing $38.m have recently been purchased.
→ A placement raising $100m will be used for the purchase with the remainder offering balance sheet flexibility.
→ The federal government is supporting the industry over the next four years with hard dollars.
→ The longer term trend remains strong.

During the last couple of reviews we’ve been concentrating on the zone of support as well as a falling wedge.  In fact we had two falling wedges in position in late September although the smaller pattern has had to be re-drawn.  Perhaps not ideal but the basic structure remains firmly in place and it’s still as significant now as it was a few weeks ago.  The bottom line though is that the upper boundary needs to be overcome which thus far appears to be in the “too hard basket ”.  On the positive side of things price is still posturing in the right area meaning the bullish case is by no means off the table. 

A push up through what essentially is diagonal resistance should trigger a multi-week and even a more bullish multi-month trend to the upside.  We’ll be looking for a rotation up toward the target area as annotated around $4.50.  Let’s also not forget that with this type of pattern price normally head up to the origin of the structure in around a half to one third of the time taken by the whole corrective pattern.  In other words if some traction can be gleaned some strong impulsive price action should be the way forward which is something we definitely want to be involved with.  One thing we don’t want to see is the lower boundary of the support zone penetrated as this will put serious pressure on the patterns.  All things being equal we’d expect those slightly lower levels to remain intact basis the strong buying demand that’s been witnessed in the past.

Trading Strategy

If you’re looking for a swing trade then the bullish trigger is still the upper boundary of the falling wedge which is pretty much where price is currently sitting.  If you are aggressive then buy following a break up through the recent pivot high at $3.08 with the initial stop set at $2.86 which is a nice low risk entry.  As mentioned above, the target zone circa $4.50 should be met over the medium term with a chance of even higher levels being achieved.  A break down through the aforementioned initial stop level would be reason for concern whilst also being reason to cancel pending orders.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.