I think it will do better than Macquarie suggests. But take care...

I think it will do better than Macquarie suggests. But take care with Huntley's call on it. The analyst there handling that stock always seemed to have a love affair with it. He was still calling it a buy long after the arse fell out of the market in 07.
I have been a holder for years and I got stuck with it back then.But I'm still trading it.

Macquarie says Neutral
Price 5 Jan 10 $4.77

Event

We review our outlook for Alesco, which is due to report its half-year result on 28 Jan.

Impact

December guidance: Alesco gave guidance in December that First Half earnings before interest, tax and amortisation will be approximately $30m (MQG previously $29.1m) and Financial Year 2010 earnings per share is likely to be 34-36 cents per share (MQG previously 43.5 cents per share).

Given an First Half estimated earnings before interest and tax of $30m, annualising First Half estimated net interest of $7.7m, a 30% tax rate and Financial Year 2010E earnings per share of 34-36 cents per share, we estimate the full-year earnings before interest, tax and amortisation to be $61.1m. This implies an Second Half earnings before interest, tax and amortisation result of $31m, essentially flat on First Half. We were expecting a recovery in earnings before interest, tax and amortisation to $39.9m in Second Half, driven by moderately improved housing conditions, cost savings and the benefits of a stronger A$.

Financial Year 2011 should improve: Given the recent improvement in housing approvals, our Financial Year 2011 earnings before interest, tax and amortisation forecast of $68.2m does not look unachievable, given Financial Year 2010 earnings before interest, tax and amortisation of $61m and Financial Year 2008 earnings before interest, tax and amortisation of $103.2m (ex the scientific and medical division).

Comfortable balance sheet: Cash flow remained strong in First Half 10 with net debt of $138m. Financial Year 2009 net debt was $159.7m and we expect Financial Year 2010 net debt to be $132.6m or 23.7% of equity. Financial Year 2010 earnings before interest, tax and amortisation interest cover is forecast at 4.4x.

Earnings and target price revision

No change.

Price catalyst

12-month price target: $5.23.

Catalyst: Housing approvals. Our price target is based on 9.0x Financial Year 2011E enterprise value to earnings before interest, tax and amortisation.

Action and recommendation

We have downgraded our recommendation to Neutral from Outperform on relative valuation grounds.