Australia | May 30 2008
By Chris Shaw
Tough economic times can be a boon for some companies and in Australia a prime example seems to be RR Australia ((RRA)), the former Radio Rentals. The company has just posted a 67% profit increase for FY08 to $10.9 million on revenue up 16%.
Commenting on the group’s result Citi notes the outlook remains bright as the company’s performance metrics continue to improve, partly because it is something of a counter-cyclical play. To reflect the improved outlook the broker has lifted its forecasts by 12-13% over the next two years, which supports its Buy rating.
On the broker’s numbers profit should continue to grow solidly in coming years as it is forecasting an increase in earnings per share (EPS) from FY08’s 8.5c to 9.6c next year and 10.7c in FY10, which accounts for start-up costs of $1-2 million as the company expands into the Adelaide market.
ABN Amro also lifted its forecasts post the profit result, its EPS forecasts now standing at 9.3c in FY09 and 10.5c in FY10. It too sees the stock as a Buy, pointing out there is no debt on the balance sheet at the same time as the growth outlook remains solid given the South Australian expansion, a national rollout of its cash advance system Cashfirst by September and the expected launch before Christmas of an online electrical goods store. As Citi notes, initial feedback here has been positive.
On the other side of the coin there may be some margin pressure and higher default rates given the current economic climate, but ABN Amro sees these as manageable and not enough to offset its positive view given the stock’s defensive characteristics, especially in times of economic uncertainty.
Given its relatively small size (the company has a capitalisation of around $90 million) it is not widely covered, the FNArena database showing three Buy ratings only, with Deutsche Bank the other to research the company. The average price target according to the database is $1.11, while the median price target according to Thomson One Analytics is $1.16.
Shares in RR Australia today are little changed in this morning trading and as at 11.20am the stock was up 0.5c at 70c, which compares to a trading range over the past 12 months of 50c to $1.00.