Small Caps | Nov 05 2018
A gap in major projects in the first half has meant earnings for concrete business Wagners will be skewed to the second half and likely to be flat over FY19.
-Market may have over-reacted to the reference to "challenges"
-Main concerns centre on ability to secure concrete work with higher margins
-Significant customer will be lost in FY20
By Eva Brocklehurst
The weather has played havoc with the performance of Wagners Holding Co ((WGN)) and, hence, expectations for FY19. The company has downgraded forecasts at its AGM, citing gaps in project work in its key state of Queensland.
Few major new projects getting off the ground means first half earnings will be down and a stronger second half will simply lead to a more balanced or 'flat' FY19. Projects such as Sydney's cross-city tunnel are still committed, although the timing is uncertain.
Credit Suisse believes the market has seemingly over-reacted to the company's reference to "challenges" which is likely to refer principally to the commencement of the Southern Cross cement import terminal, which is well understood and theoretically priced in to the stock.
The continuation of the sell-off in the share price, Morgans suspects, is partly attributable to the lack of visibility on FY20 trading. While major projects will be forthcoming, competition is also increasing. Still, the broker finds it hard to envisage Wagners is ex growth.
Revenue growth is being sustained from increased contributions from lower-margin divisions and and Morgans emphasises the lumpy nature of infrastructure projects that are prone to delays. Ultimately, the broker believes Wagners is well placed as a low-cost producer in south east Queensland and can achieve earnings growth in FY20.
Macquarie is more cautious about the outlook, as there is limited visibility on the pipeline of projects and the potential for margin compression. Given peer trading multiples, the broker envisages potential for further de-rating. The main concerns centre on the ability to secure the concrete work that attracts higher margins.
The slow recovery in Queensland for infrastructure and a tight fiscal position in that state indicates that volumes could remains somewhat challenged. This in turn reinforces the broker's concerns regarding the top line and earnings certainty.
Wilsons found the trading update rather ambiguous and was surprised by the lack of quantitative guidance, as the end of the first half is less than two months away. The broker's revised forecasts reflect a first:second half split of 60:40%.
Wilsons estimates concrete products and precast concrete are the most affected divisions and there are some lingering concerns regarding medium-term earnings. This is largely emanating from sector concerns regarding infrastructure delays and the increasing costs of cement grinding. The company also faces the loss of a significant customer, Neilson Group, in FY20.
Credit Suisse models the loss of the entire 100,000t of cement volumes supply to the Neilson Group. Yet, the company has a growing base and there are several upside opportunities that may drive a step change to earnings in coming years.
The most immediate is the Anadarko LNG, targeting an investment decision in the first half of 2020. This alone could almost double the company's operating earnings (EBIT), providing annual revenue of over $100m and margins above 30%.
Wagners did not provide an update on the Mozambique project. Revenue of $200m is expected with operating earnings' margins of 30-50%. Whilst margins appear attractive, Wilsons suspects this project may involve a high degree of risk.
The broker, not one of the eight monitored daily on the FNArena database, points out contractor-derived earnings are increasing while construction materials-derived earnings are declining, and this will be particularly evident in FY20. Moreover, this is not factored into current valuation multiples.
Wilsons maintains a Sell rating and $2.95 target. FNArena's database has two Buy ratings and one Sell (Macquarie). The consensus target is $3.60, suggesting 3.8% upside to the last share price.
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