Australia | Nov 10 2008
By Chris Shaw
From a share price of almost $16.00 in November of last year, the global financial crisis has played havoc with outsourcing and maintenance services group Transfield Services ((TSE)). Shares have slid to less than $4.00 of late, firstly on the back of earnings concerns and now as a result of management issues.
Last Thursday, group managing director and CEO Peter Watson announced his resignation, which will come into effect from next April. At the same time, UBS notes there has been press speculation as to a possible capital raising from the company, which UBS suggests would be in relation to around $200 million the company has due to be refinanced by the middle of next year.
The speculation appears to have some substance, as the company has this morning entered into a trading halt pending the release of an announcement. According to UBS, there are negative connotations for investors from both issues as it increases uncertainty, which leads the stockbroker to suggest there is little chance of the shares outperforming in the shorter-term.
ABN Amro agrees and adds there are also earnings concerns from both operating conditions in New Zealand and the US and adverse foreign exchange movements, which have led it to trim its earnings estimates further in coming years. These flow through in later years in particular, with the broker cutting 7% from its FY10 numbers and 8% in FY11.
As ABN Amro points out, the fact 50% of group earnings are generated in New Zealand and the US leaves the company exposed to further falls in earnings in the shorter-term, especially as a management transition adds to uncertainty as to the company’s outlook and the actions it may take to address the earnings issues.
Others in the market have voiced similar concerns, with JP Morgan advising clients last week it saw earnings risk as to the downside for the company, while Macquarie’s concern is centred on the view the group’s gearing level is too high in the current environment, adding weight to the capital raising speculation.
In earnings per share (EPS) terms, ABN Amro now expects the company to earn 54.9c in FY09 and 54c in FY10, meaning flat earnings for some time given FY08 EPS was 53.6c. In comparison, UBS is forecasting EPS of 59c this year and 68c in FY10, while consensus numbers according to the FNArena database are 57.3c and 62c respectively.
The changes to its forecasts lead ABN Amro to downgrade its rating to Hold from Buy, a move the stockbroker makes despite the stock appearing cheap at current levels. On its numbers, the company is yielding more than 10% and is on a FY09 P/E (price to earnings ratio) of less than 7x on a normalised earnings basis, which under normal conditions would suggest a cheap stock.
Deutsche Bank recently offered a similar argument, suggesting while the stock offers some value, the lack of any earnings recovery prior to FY10 at the earliest limits the scope for any share price outperformance. The broker rates the shares as Hold, while the FNArena database shows a total of two Buy recommendations and six Holds. It is worth noting the Buy ratings of Aspect Huntley and Citi were made prior to the announcement of the MD’s departure and so may be revised in due course.
UBS made the same move as ABN Amro in downgrading its rating to Neutral from Buy, while also factoring in a larger discount in terms of its price target that sees its target fall to $4.50 from $6.00. ABN Amro’s target has been revised to $4.70 from $5.75 on its changes to earnings, which brings the average price target on the stock according to the FNArena database to $5.97 from $6.34.
Today, shares in Transfield are suspended pending an announcement, having last traded at $3.50.