Australia | Nov 02 2015
-Execution key to benefits
-Trading environment still weak
-Better placed for M&A?
By Eva Brocklehurst
Transpacific Industries ((TPI)) will undergo an organisational restructure with CEO Vik Bansal targeting $30m in cost cutting benefits. The company will reduce its two customer-facing brands to one, Cleanaway, to reduce duplication.
Brokers observe a clear intent on the part of the new CEO to grow the business in terms of profit and dividends, with a new operating model and containment of capital expenditure. Cost reductions will include administration and comprise both labour and non-labour. Savings will be re-invested into further improvements in systems and defending and growing market share.
Execution is the key. UBS highlights the restructuring mode that has been in place for several years, with various strategies being employed by several CEOs. As a result, the broker wonders whether it will work this time. Management continues to face macro headwinds and challenging operating conditions but UBS acknowledges there is some ground work that has been put in place by previous efforts.
All else being equal, a $30m uplift to FY18 earnings would translate into a 28% increase to estimates and put the stock on a FY18 price/earnings ratio of 11, the broker calculates. UBS has a Buy rating on the basis that earnings expectations are low and the stock is cheap relative to international peers.
Moreover, with a sound balance sheet, re-based earnings and low expectations, there is upside potential from an M&A perspective, the broker contends. International competitors or private equity could manifest interest and, in such a scenario, UBS applies a 30% take over premium to its price target of 83c which implies fair value at $1.04.
The downside is that there remains short-term earnings risk from broad economic weakness and, if earnings declined 10% from the broker's current FY16 estimates, the stock could de-rate and result in fair value potentially falling to 31c.
Deutsche Bank views the catalysts as revenue growth from new sales initiatives and cash flow coming in over and above the landfill remediation provision. The broker continues to expect FY16 earnings of $267m, comprising 2.0% organic growth, $22m incremental benefit from acquisitions and a $9m benefit from one-off cost reductions.
The new strategy is credible, in Macquarie's opinion, and FY16 trading conditions are considered consistent with FY15. The balance sheet is strong and, while debt levels were lower than expected in FY15, this situation should rebound in FY16, the broker maintains.
Morgans highlights the record of false starts of corporate reform and so, until there is evidence, remains cautious. The broker notes the company provided no indication on the up-front cost of achieving the cost cutting benefits and does not expected the improvements will be noticeable until FY17, as the company intends to reinvest the gains in the current year.
The company also reported no improvement in trading conditions, although it expects to increase earnings in FY16. Landfill and remediation continue to use up a substantial amount of capital, Morgans observes. The broker retains a Hold rating.
FNArena's database has three Buy ratings and three Hold, with two of the brokers yet to update on the latest announcement. The consensus target is 78c, suggesting 14.5% upside to the last share price. Targets range from 71c (Morgans) to 83c (UBS).
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