New analyst report now for VDM Group. Released a couple of days...

New analyst report now for VDM Group. Released a couple of days ago.

Target price is 30 cents.

"Revenue slipping in 2H.
Continued contract delays and wet weather look to continue impacting 2H11e earnings for VMG, with staffing being retained for the expected upturn in activity but limited revenue against the cost. We expect that this weakness will carry into 1H12e and as such have made some fairly substantial cuts to our NPAT forecasts to a loss of $9.5m in 2H11e. We are now forecasting an NPAT loss of 7.8m in FY11e (prev +$4.5m) and a modest profit in FY12e of $0.2m (prev $6.0m).

Not without its risk
VMG is bar far the riskiest proposition we cover in the space, but has the greatest upside potential of any stock we cover in the sector. The tender book has doubled in size over the past quarter and moves are being made to exit non-core property assets to remove the residual bank debt balance(c$9m). There is substantial fixed cost leverage in the business and when contract awards begin to flow earnings can move very quickly in the other direction. Speculative Buy retained albeit on a lower target of $0.30ps (prev.$0.37ps).

There is no denying the significant fixed cost leverage the business has to contract delays, but by the same token when work does come through there will be a substantial uptick in earnings. Outstanding tenders have doubled in the past three months from $750m to $1.3Bn and there have been some Letters of Intent signed. This signals to us that the medium term outlook is far more compelling, if
the company can get through this period."