Australia | Aug 12 2008
By Chris Shaw
Given its exposure to the resources and infrastructure sectors, United Group ((UGL)) was always likely to deliver solid earnings growth in FY08. The group has done just that, delivering a net profit of $136 million for the year compared to just under $100 million in FY07.
But while the result was a little better than consensus forecasts, Citi notes it was helped by a lower tax rate and a lower interest expense and showed a couple of patchy numbers, in particular the performance of the Equis division. Austock Securities agrees the result was a little less than it could have been, pointing out the Services division in particular was a disappointment.
As well the broker notes the earnings guidance for FY09 was somewhat vague, as while greater than 10% earnings growth is anticipated, there was little detail to go along with the guidance. On the plus side, the Australian rail and resources businesses delivered better results than Deutsche Bank had forecast and so offer some scope for upside going forward. However, the services business remains a concern with respect to future earnings as it could, as Citi notes, turn negative as was the case in the second half of 2008. As well the broker notes the division has a relatively large fixed cost base, which won’t help given expected lower levels of activity in the US.
Post the result, the revisions to earnings estimates are fairly modest. Austock has cut its earnings per share (EPS) forecasts by 3% in FY09 and 4% in FY10 to 94.8c and 103.8c respectively, which compares with the 83.7c delivered in FY08. Citi, in contrast, is forecasting EPS of 96.5c in FY09 and 108.4c in FY10, while Deutsche Bank is at 99c and 107c respectively. Consensus forecasts according to the FNArena database are 96.7c and 107.6c.
Changes to broker ratings have been more pronounced, with both upgrades and downgrades flowing through post the result. Both Citi and UBS have downgraded the company to Hold from Buy on valuation grounds, with Citi pointing out the stock has rallied 14% since April against a fall in the broader market. UBS, on the other hand, sees little relative value given the stock has put on a bit more than 20% in the past two months.
Deutsche Bank has gone the other way and upgraded to a Hold and lifted its price target to $13.05 from $11.00, saying the stock now offers improved value, though not enough to turn more positive, given the potential downside earnings risk in the services division.
Even those with a Buy rating, such as JP Morgan, are somewhat controlled in their enthusiasm. The broker points out while the earnings growth suggests at least a market multiple for the shares is appropriate, the stock is at a modest premium to this at present and so offers only relative value.
Overall, the FNArena database shows four Buys, one Accumulate and three Hold ratings, with an average price target of $14.42, which compares to $14.23 prior to the result. Today, shares in United Group are slightly weaker, in line with the broader market. At 12.15pm the stock was down 9c at $13.90. This compares with a range ove the past year of $10.75 to $21.87.