Bottlenecks take toll on Coates Hire(abc.com.au/lateline buiness...

Bottlenecks take toll on Coates Hire(abc.com.au/lateline buiness interview with MALCOLM JACKMAN, CEO, COATES )

Bottlenecks and poor export volumes have taken their toll on the earnings of Australian equipment hire firm, Coates Hire.

Transcript
ALI MOORE: Bottlenecks and poor export volumes have also hit earnings at Australia's largest equipment hire firm.

Investors wiped 4 per cent from the value of Coates Hire today off the back of a profit warning which is the second dose of bad news from the company in the bad four months.

However after a sustained period of strong growth the last 12 months have been patchy.

MALCOLM JACKMAN, CEO, COATES: We've seen the north and the west perform very strongly and the mining resources sector perform very strongly. But in other areas around non residential construction particularly in the south and east it's been somewhat weaker.

ANDREW ROBERTSON: In February, Coates revealed first half earnings down 6 per cent to $46 million. Today, Coates lowered its full-year profit forecast by 5 per cent to $121 million. This year is the first time Coates has given profit guidance and chief executive Malcolm Jackman concedes the lowering of that forecast is not a good look.

MALCOLM JACKMAN: The reality of like is mine production levels are down in significant areas. We've seen bottlenecks in the ports and on the rail heads particularly on the east coast with coal and lot of coal miners this year will export less product this year than last year even though the prices are up, volumes are down.

ANDREW ROBERTSON: Simon Kent Jones covers Coates for stockbroking firm Ord Minnett. He believes that maybe taking Coates longer than expected to bed down the acquisitions it's made in recent times.

SIMON KENT-JONES, ORD MINNETT: Any company that is growing at a hefty pace and is being priced on fairly large valuations, the share price has gone up quite strongly, then the market expects to get some colour as to earnings so the stock doesn't get away from it.

ANDREW ROBERTSON: Coates share price is down substantially from its record high 12 months ago and that's attracted and attention of private equity.

The company is refusing to reveal, though, who those potential private equity bidders are and according to chief executive Malcolm Jackman in his view Coates is not for sale.


SIMON KENT-JONES: It would be difficult I imagine for a private equity firm to acquire Coates now at a hefty premium and then look to spin it out in the next three to four years. It's difficult to see what kind of return that they might produce.

exert from theage.com.au

Equipment hire company Coates Hire Ltd says bottlenecks at the nation's coal exporting ports have forced it to downgrade its profit outlook and that it remains a takeover target.

Delays at ports on the east coast and on rail networks were holding up resource companies that used machinery from Coates' subsidiary Allied Equipment, Coates managing director Malcolm Jackman told AAP.

The company, one of the largest equipment hirers in the nation, said its net profit for the financial year could be about five per cent lower than the $106 million forecast in February due to "patchy" trading conditions, which especially hurt its Allied Equipment and its Queensland operations, Coates North.

"Allied Equipment brings in about $6 million in revenue a month and that is likely to stay flat. It has not reduced, but it just hasn't grown," Mr Jackman said.

He said that because the transport bottlenecks were inhibiting production growth, mining companies were less in need of hired equipment.

"They are working their equipment harder as a result and not using ours," he said.

Customers' projects were being held back by a shortage of skilled staff, particularly in Victoria and NSW, Mr Jackman said.

"Construction companies are short of people," he said.

"Jobs are happening, but not happening at the pace they would like."

The drought had also hampered some operations with water-using equipment.

"The economy is very strong and lots of good things are happening. It is very bullish in Queensland, but there is quite a bit of patchiness out there," Mr Jackman said.

Mr Jackman added the an improvement in net profit was expected for fiscal 2008, with expectations for Coates North, a new construction arm in Queensland, "very robust".

"It should be noted that operating net profit after tax (NPAT) is still expected to be ahead of prior year (2005-2006) by at least 7.5 per cent," Coates said.

Coates Hire generates about 10 per cent of its revenue from the Allied Equipment division, which hires equipment to resource firms, while almost 30 per cent of total revenue came from the construction sector.

Mr Jackman said it could take a year to sort out the bottle necks on transport networks, with ships waiting 28 days to load at some ports on the east coast.

The backlog expected to be particularly bad in July and August.

Mr Jackman said the profit downgrade was flagged because Coates was halfway through a strategic and operations review after receiving takeover approaches.

These are understood to involve a private equity firm.

"The review team will report back to the Coates board at the end of this month and the board will start making decisions," Mr Jackman said.

Total investment for the current financial year had been downgraded to $400 million in February to $365 million, Coates said.

In August, Coates reported a 54 per cent jump in net profit to $100.04 million for 2005/06.

Deutsche Bank analyst Neil Watson said Coates did not fall into the category of a company with an under-geared balance sheet.

"It is a capital hungry business," he said.

"They are spending more than they are depreciating their equipment. A private equity firm might look at slowing that down."


Equipment hire company Coates Hire Ltd has revised downwards its net profit forecast for this financial year, with "patchy" trading conditions to blame.

Coates has said net profit after tax (NPAT) could be about five per cent lower than the guidance of $106 million provided in February.

In a statement to the stock exchange on Thursday morning, Coates blamed poor trading conditions, particularly on the eastern seaboard, and capacity constraints in Queensland impacting its mining service subsidiary, Allied Equipment, for the revised outlook.

"Trading conditions together with overall demand have remained patchy and not met expectations especially for Allied Equipment and Coates North," the company said.

"Within Queensland, capacity constraints have caused project delays.

"Trading patterns for Allied Equipment have remained relatively flat over recent months despite the improvement seen since December following the acquisition of Allplant.

"The main contributing factors were a slowing in mine production growth rates caused by bottlenecks, an improvement in new equipment availability, and a shift in the own/rent ratio amongst miners, while at the same time shortages of skilled maintenance staff has led to a shift in market demand to newer rental equipment."

Despite the downgrade, Coates stressed that operating NPAT would be stronger than last financial year.

It also predicted "substantial improvement" in fiscal 2008.

"It should be noted that operating NPAT is still expected to be ahead of prior year by at least 7.5 per cent," Coates said.

"(And) with demand improving steadily, Coates now believes substantial improvement is likely to occur during first half FY07/08".

The statement said that, because Coates was currently undertaking a strategic review, the board "considered it prudent to inform the market" of the likely NPAT decrease.

Coates, which has been the focus of takeover speculation, will announce the outcome of the review before its full-year results announcement in July.