Transfield Result Restores Some Confidence

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This story features TELSTRA GROUP LIMITED.
For more info SHARE ANALYSIS: TLS
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

When Transfield Services ((TSE)) downgraded its earnings guidance earlier this year the market dealt with it harshly, selling the stock down from more than $13.00 in May to below $8.00. But the company has now reported earnings of $106 million and this was in line with its revised guidance, leading ABN Amro to suggest the company’s model is far from broken.

Adding weight to this view is the earnings guidance from management that indicates net profit after tax should grow by 10-20% in FY09, an outcome Deutsche Bank sees as quite achievable given resources and infrastructure joint ventures are expected to continue to deliver strong growth.

Post the profit result, consensus earnings estimates for the company according to the FNArena database stand at 62.3c for FY09 and 71c for FY10, while UBS is even more aggressive with its numbers and is forecasting outcomes of 68c and 77c respectively.

The major issue for the company, in Deutsche Bank’s, view is ongoing margin compression in the property and facilities management divisions, which it struggled with a little in FY08. Offsetting this, it notes stricter controls meant some improvement in working capital, as days receivable and inventory days both fell while days payable rose slightly.

This is an important trend in the broker’s view, as gearing is currently limited compared to historical levels and so will cap the company’s ability to grow via acquisitions. Having said that, it does expect the company to pursue some minor deals in the coming year. Citi notes operational cash flows remained strong and this should help with respect to gearing levels going forward.

As ABN Amro points out, while the result had some compositional issues and appears to indicate a slowing in the Australian business in the second half, the fact management are providing a better breakdown of earnings should go some way to improving the market’s perception of the business, which was hurt by the downgrade in June.

In its view, much of the downgrade was beyond the company’s control, as it was the result of exposure to a weaker US economy and a slight pulback in consumer discretionary spending in Australia, as well as the loss of the Telstra ((TLS)) access services account

UBS agrees the result showed mixed performance from the offshore operations and the US in particular, though on the positive side, it points out the turnaround in the New Zealand business continued, with sales growing by a little more than 30%. 

Post the result, ABN Amro has retained its Buy rating, a view shared by many in the market given the FNArena database shows six Buy ratings compared to two Holds. One of these is courtesy of Deutsche Bank, with the broker suggesting the stock is fair value at current levels given it is trading at a small premium to the S&P/ASX100 index at present.

It has set a target price on the stock of $7.95, which is well and truly the lowest in the market. The database shows an average target of $9.70, the highest being UBS at $11.00. The median price target according to Thomson One Analytics is $10.26.

Today, shares in Transfield are down slightly in a weak overall market and as at 1.30pm, the stock was 9c lower at $8.09. This compares to a trading range over the past 12 months of $6.92 to $16.32.

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