Is The Market Underestimating Hastie's Earnings Potential? FN ARENA NEWS - 20/06/2007
For companies with operations in mature and or cyclical sectors the ability to expand into faster growing market segments is an important way to generate stronger earnings growth, which in turn is usually rewarded by the market with higher earnings multiples. Hastie Group (HST) represents such an example of a company expanding away from its core refrigeration operations, which was initially focused on supplying refrigeration needs for supermarkets but via expansion has moved into the higher margin industrial refrigeration supply and refrigeration maintenance markets as well as into the air conditioning industry.
According to Deutsche Bank, which this week initiated coverage on the stock with a Buy rating and $4.20 price target, the market is now underestimating the growth potential the company's new structure offers.
Deutsche expects organic growth will actually be as much as 10% higher than market consensus earnings forecasts for FY08 suggest, helped by both its now national footprint and ongoing acquisitions, one of the more recent being the purchase of industrial refrigeration company Gordon Brothers.
Given the refrigeration market remains very fragmented the broker expects more deals to be announced, particularly as there is still capacity on the balance sheet for further acquisitions. Intersuisse, who rates the stock as a Long-Term Accumulate, agrees, expecting more consolidation in the air conditioning sector in particular as the group attempts to build on its current 20% market share.
But growth is unlikely to just be domestic as Deutsche notes the company's market share in New Zealand is also increasing, while the recent entry into the United Arab Emirates market is also showing signs of delivering benefits to shareholders.
With management having provided the market with earnings guidance for FY07 there is unlikely to be too great a surprise when the company reports in August, as earnings per share (EPS) should come in close to the guidance of 19.5c.
In Deutsche's view it will be the shift to focus on FY08 earnings that generates a re-rating for the stock as on its numbers the shares are trading cum an earnings upgrade. As an example, it is forecasting EPS in FY08 of 28c while Intersuisse forecasts 24.7c. It is also more bullish on the likely dividends the company will pay, forecasting a FY08 payout of 17c against 14c for Intersuisse.
Assuming Deutsche is close to the mark it implies the stock is trading on a FY08 P/E (price to earnings ratio) of just 12.6x, with a yield of almost 5%. Such numbers would suggest the stock is good value at current levels, as does the broker's forecast of capital annualized growth in earnings over the next three years of 34%. This reflects its new position as a business with low capital and cash intensity but a high return on equity.
Aspect Huntley is also relatively positive on the stock, having this week upgraded its rating to Accumulate from Hold. Its more positive view is along the lines of the Deutsche outlook in that it sees potential for additional earnings growth, with expansion in the UAE potentially adding as much as 40c to its valuation.
Its valuation currently stands at $3.85, which is close to the Deutsche Bank number of $3.99. Allowing for additional acquisitions has seen Deutsche set its target price for the stock at $4.20, while Macquarie also has a Buy rating on the stock according to the FNArena database with a target price of $3.36 though this recommendation has not been updated for a few months.
It has to be noted though Macqaurie has included the stock in its list of top recommendations, the so-called "Pick of the crop".
Shares in Hastie today are trading slightly lower as at 11.45am the stock was down 1c at $3.64.
-------------------------------------------------------------------------------- Share Cafe Related Items -
HST Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
