TSE issued an 8-9% profit warning and the stock sold off 25%. Management now expect FY08E normalised NPAT (preamortisation) to come in around $105-110m versus previous consensus estimates of $115-120m (est. $117.7m). At the EBITA level we estimate the downgrade is in the order of $13-15m.
Key reasons for the downgrade include 1) the strong A$ ($8-10m EBITA impact), 2) rising fuel costs across the Group, 3) margin deterioration and a lower level of high-margin snow removal work for US Maintenance (USM) and finally, 4) the deferral of some refinery turnaround work for TIMEC which management previously expected to hit FY08E.
We have downgraded our normalised NPAT forecasts by 9.5% in FY08E. The key drivers behind our downgrade are a higher A$, lower USM margins and slightly lower TIMEC revenues. Our 10.5% downgrade in FY09E is largely a basing effect from our revised FY08E forecasts but we have also lowered our USM margin expectations slightly.
Given the share price reaction today, one might think the TSE business model is broken. We don’t subscribe to that view, but we do agree the USM business model does need to be put under review to help protect margins in the future (i.e. increase the level of self-perform work done). This issue needs to be addressed by mgmt, but in the meantime, the core Australian businesses continue to perform well and we believe Group earnings growth of 10-15% p.a. over the next 12-24mths is achievable. Our DCF valuation is $12.79 and we think the recent sell-off now offers an attractive entry point, hence we upgrade our recommendation to Accumulate with a Jun09 price target of $13.80.
TSE Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
