Small Caps | Jan 23 2019
While agreeing that a slow start to project work has taken its toll on the FY19 outlook for concrete business Wagners, broker views diverge on the growth potential.
-Investment in capacity for growth considered a positive development
-But can the core domestic concrete/cement market support such aggressive investment?
-Substantial tender pipeline, both domestic and offshore
By Eva Brocklehurst
As Wagners Holding Co ((WGN)) builds a bigger business, a slow start-up for projects has combined to affect FY19 guidance. Guidance, reduced by -7.5% at the mid point, is for an operating earnings (EBIT) range of $35-38m. Macquarie asserts this is principally a consequence of trading profit not covering the increased depreciation charges associated with investment in capacity, as well as the delay in major projects getting off the ground.
While expecting the negative market reaction, Credit Suisse points out project timing was already a known issue and investment for growth is a positive development. At its November AGM, the company had flagged that delays to major projects would affect near-term earnings. As such, Credit Suisse believes the focus should be on the signal that the investment intentions send.
The near-term earnings hole centres on the domestic cement and concrete business, with the uncertain timing of projects and a competing cement import terminal. However, looking offshore, with two LNG projects in Mozambique holding promise, amid the prospect of next-generation building materials, the broker envisages potential to double earnings.
Morgans also highlights a need to invest in capacity ahead of the next growth phase, up-scaling to compete for the large infrastructure projects being tendered, both domestic and offshore.
The broker does reduce concrete, cement, aggregate and crushing sales assumptions in line with the update. Assumed margin differences between products means forecasts for revenue remain stable while operating earnings (EBIT) forecasts have declined.
Morgans suspects FY19 will be the low point for the earnings, as this is the first time in several years the company does not have any major project work. If Wagners were incapable of growing earnings beyond current levels then the broker would accept the current share price is justified.
This is not likely to be the case, and Morgans envisages Wagners winning some project work and continuing to roll out the fixed concrete network. Still, considering four weather-affected months at the start of FY19, the broker acknowledges earnings are not likely to be significantly better until FY20. The stock appears cheap to Morgans, nonetheless.
Macquarie disagrees, believing the stock is overvalued because of the complex fundamentals in the core domestic concrete/cement market and the performance of the core business cannot support the aggressive investment that is required.
The slow progression of south-east Queensland infrastructure projects has frustrated the company and deferred significant earnings, Morgans accepts. There is still potential work to be won, including the Adani coal project, the Bruce Highway upgrade, Kidston hydro, several wind farms, the inland rail and Surat CSG, amongst others. Winning any work in these projects should carry earnings beyond the FY19 levels, the broker suggests.
On FNArena's database there are are two Buy ratings and one Sell (Macquarie). The consensus target is $3.06, suggesting 9.4% upside to the last share price. Targets range from $2.05 (Macquarie) to $3.70 (Credit Suisse).
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