Australia | Aug 20 2014
-Subdued earnings near term
-Acquisitions likely catalyst
-Question of prior asset valuations
By Eva Brocklehurst
Tough conditions persist for Transpacific Industries ((TPI)). The company may have overshot broker estimates for FY14 at the headline but the composition of the results suggest weakness. The result was helped by the New Zealand business, which is now sold, and lower interest and tax. The main positive was the early resumption of dividends. The main negatives were a significant impairment charge and adjustment to remediation provisions.
CIMB likes the longer-term outlook and backs the attempts to turn around the business through top line growth, efficiencies and the redeployment of capital. It just takes time. Nevertheless, the broker cannot find the valuation appealing at current levels and downgrades to Hold from Add. The company has made a $189m extra provision for revised valuation of landfill remediation costs and total provisioning now sits at $347m. The company expects closure of landfills in Victoria and NSW over the next few years.
The glass is now half full, in Deutsche Bank's view. The company has improved its balance sheet significantly, having divested non-core assets, and management can now focus on revenue and operating efficiencies. While awaiting strategic initiatives to get going, the broker retains a Buy rating.
Credit Suisse was unimpressed with the quality of the result and downgrades forecasts for FY15-17 by around 20%. The recently appointed CEO, Robert Boucher, has indicated his strategy on sales, market share and price will take 18-24 months to implement. Until then, subdued conditions and the required investment will weigh on earnings. Management is actively pursuing landfill acquisitions and, with the company carrying significant head room on debt, these could drive earnings accretion, in Credit Suisse's view. There is limited upside in the short term as acquisitions remain the likely positive catalyst. The broker sticks with a Neutral rating.
The primary reason behind retaining a Buy rating is the belief that management can execute on its strategy, in UBS' opinion. Recent market share losses and limited landfill capacity in NSW and Victoria mean a number of short term challenges. The broker counsels investors to add the cash liability on remediation that will total $175m over the next five years to enterprise value calculations going forward. Trading conditions are expected to remain consistent with FY14 and the broker has reduced revenue estimates by 5% and earnings margin estimates by 131 basis points.
The provision for rectification and remediation is absolutely necessary, UBS asserts, as, while the short term cash impact is larger than expected, it is a better outcome than an environmental disaster. The broker considers the company is in excellent shape, as evidenced by the decision to pay a final dividend and introduce a policy of paying regular dividends of 50-75% of underlying profit going forward.
The asset base may be more realistic now but, given the risk around future capital allocation and positioning in the waste management value chain, JP Morgan takes a cautious view and retains a Neutral rating. The broker is concerned that, given the lack of quality, strategically-located landfill assets available, the transaction multiple the company is likely to pay may be difficult to justify.The company has increased remediation provisioning beyond expectations. Furthermore, given the extent of impairment adjustments, JP Morgan suspects earnings from these assets were historically overstated by both Transpacific and previous owners. The broker believes a reduction in the provisioning in future years could be a meaningful driver of earnings.
On the FNArena database there are three Buy and three Hold ratings. Consensus target is $1.07, suggesting 19.3% upside to the last share price, and compares with $1.24 ahead of the results. Targets range from $1.00 (CIMB) to $1.18 (Macquarie).
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