Australia | Nov 28 2008
By Chris Shaw
One ramification of the global economic downturn is a reduction in both current and expected activity levels across a range of industries. This fact has played havoc with the share price of commercial services provider Hastie Group ((HST)), which has fallen from around $5.00 this time last year to not much more than $1.00 currently.
But a number of brokers in the market don’t consider the share price reaction to be justified. While there are concerns over the outlook for FY10 and beyond given the slowdown and the contracting nature of the group’s operations, the opinion is these concerns appear to have been substantially overplayed.
As evidence of this, UBS notes management has confirmed previous earnings per share (EPS) guidance for FY09 of between 35-38c, which is slightly above the broker’s own forecast of 34c. Even when a decline in FY10 earnings to 30c in EPS terms is factored in, the broker suggests the stock is still too cheap. Such a return puts the stock on a P/E (price to earnings ratio) of just over 4x in FY10.
Operational performance tends to support the broker’s view, as it notes the company has just picked up an aditional contract in the North-West shelf that should be worth in the order of $29 million. Macquarie notes this has the added benefit of building the FY10 order book as well given the contract is not scheduled for completion until the middle of next year.
In Macquarie’s view, the fact the stock is trading at such a low P/E means the market is expecting a significant downgrade to earnings. However, the company’s track record suggests a P/E of closer to the small cap market average of 9-10x would ordinarily be justified.
In contrast to these apparent market expectations, the broker sees scope for the company to actually maintain earnings in FY10 given there remains opportunities to build the order book on the back of new and significant government contracts and further cross-selling of the group’s services.
As well, the broker notes balance sheet capacity of around $70 million and significant clearance with respect to existing banking covenants mean additional growth by acquisition is not unreasonable. This is especially so in a market where acquisitions are now substantially cheaper than they were a year or so ago.
Reflecting this, Macquarie’s EPS forecasts are 33.8c this year and 32.9c in FY10 and this makes it slightly more optimistic than UBS in the medium-term. Credit Suisse is even more positive and forecasts EPS of 34.5c in FY09 and 33.5c in FY10, as it too sees broadly maintaining earnings in coming years as reasonably attainable.
The rest of the brokers covering the stock agree, as the FNArena database shows a perfect seven-for-seven in terms of Buy ratings, with an average share price target of $2.89. Macquarie and Citi lead the way with targets around the $3.70 mark, while ABN Amro is the low marker at $1.70, but this still suggests upside of around 30% from current levels.
Today, shares in Hastie Group are stronger in line with the broader market and as at 12.00pm the stock was up 7.5c or more than 6% at $1.25. This compares to a trading range over the past 12 months of $1.06 to $4.95.