FCL Still heading south like it’s never going to rain again ,
got to be good for 12 month hold at or near a $1.00and collect the divvy
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Snapshot taken at 1:59:28 PM Wednesday, 30 October 2002 AEST
Futuris Corporation (FCL.AX) Hold Industrial, Diversified Australia
Price@24/10/2002: A$1.26
12 month range: A$1.94 - 1.05
Valuation: A$1.10
Price Target: A$1.15 (-9%)
Market Cap: A$774.7m/US$429.7m
Shares on Issue: 614.9m
AGM commentary points to 15-20% drop in interim NPAT.
FCL stated at its AGM that it expected its 1H03 NPAT to be 15-20% below last year; however, it forecasts a substantially better performance in the second half.
We are forecasting $28.5m for 1H03, down 20% on pcp and $33.5m for 2H03.
While almost all of this earnings weakness can be attributed to the drought, we believe it is too early to consider changing our rating until we get more earnings visibility on its impact and a timeframe for recovery. The 6.2% fully franked yield and strong balance sheet should support the stock price.
Event
10% earnings downgrade post AGM commentary.
Impact
We have cut our FY03 NPAT forecast by 10% to $62m and FY04 by 13% to $71.3m. The downgrade is mainly due to a cut in livestock and merchandise earnings. However, we have cut $3m from our Air International (AI) estimates given the current margin pressure.
Elders merchandise sales are c15% below management’s budget for the 1Q03. Low livestock prices have impacted brokerage sales. FCL’s wool processing business, BWK, continued to struggle. However, wool broking, real estate, insurance and finance earnings were on budget in 1Q03.
Valuation
We have cut our valuation to $1.10 from $1.20 valuation, which is based on an FY03E PE of 10x. Our $1.15 price target represents a c5% (12-month bond rate) premium to valuation.
Action
We maintain our Hold rating on FCL. As for FCL Elders’ major competitor Wesfarmers, we cut rural distribution earnings on October 1 by $10m to reflect the likely impact of the drought. Rural Distribution accounts for <10% of WES group EBIT compared to c60% for FCL. We maintain our BUY on WES. Additional Information
Management stated that AI sales were tracking to budget, however high start up costs associated with disrupted production and schedules for both the new Ford Barra project and General Motors Holden's VY project had temporarily reduced margins. This is anticipated to settle over the next few months and the sales outlook was strong. Given that major contracts with Australia and the United States swing into full production in the next few months, the second half contribution from AI should be substantially stronger than the first half.
We are forecasting AI 1H03 EBIT of $19m, followed by $26.5m in the 2H03.
Investment Risks
FCL services the rural and automotive industries. Both can be volatile in terms of price and volumes. FCL has a significant investment in a fixed cost base, which could cause volatility in earnings if conditions change in its end markets.
