Huntleys has come out with the following $4.10 fair value (probably over 12 mths>??) Hope this helps...
Recommendation: Buy
The reliable earnings stream brought about by long term and integrated services contracts plus low risk infrastructure projects makes TSE an attractive investment prospect. Services growth stems from renewal of long term contracts, acquisition of new customers and development of relationships in new areas. TSE has an extremely good record of contract retention. Much of the services work carried out is integrated with the customer operations and considered 'mission critical' and is therefore evergreen. A willingness to establish joint ventures increases the chance of gaining work in new areas. The 49% stake in Transfield Services Infrastructure (TSI) provides a steady income stream through dividends and management fees plus a pipeline of operations and maintenance contracts via the assets in that fund. Event 04-Dec-2008
TSE completed the hugely painful $204m equity raising via an institutional placement and entitlement offer at $1.25 per share. An additional $102m is being sought from retail shareholders on a basis of 1 share for every existing share held on the Record Date Friday November 28. We have had positive recommendations on TSE for some time. Sadly we did not anticipate the currency/debt issue.
Business Impact: The balance sheet is now in better shape. We expect net debt/equity to improve from 107% just prior to the offer to 71% at June 2009. Net interest cover should be over four times in FY09 and five in FY10. We conservatively expect only half the Retail Offer to be taken up. It is not underwritten. CEO Peter Watson will leave the company in April 2009 after eight years. There is greater uncertainty over future direction until a successor is appointed. Our discount rate is increased slightly. Our FY09 NPAT forecast drops from $119m to $117m. FY09 EPS falls from $0.60 to $0.38. Some longer term growth assumptions are also modestly reduced. We anticipate 16c dividends this year, providing an attractive 10%+ fully franked yield at a price of $1.80. Fair Value declines from $10.30 to $4.10. The share price is undervalued for higher risk investors on a long term view. We recommend shareholders in this category take up their entitlement should the market price be above the Offer Price.
Forecast Impact: --
Recommendation Impact: No change. Event Analysis
TSE completed the hugely painful $204m equity raising via an institutional placement and entitlement offer at $1.25 per share. An additional $102m is being sought from retail shareholders on a basis of 1 share for every existing share held on the Record Date Friday November 28. The offer, also at $1.25, closes Monday December 22. To raise further funds, a non-underwritten DRP will start from the FY09 interim dividend and the future dividend payout ratio will be reduced to 50%. Management will also reduce capex to boost cash generation. We have had positive recommendations on TSE for some time. Sadly we did not anticipate the currency/debt issue. Belgiorno-Nettis family is understood to have reduced their overall stake in the company from 29% to 17% by not fully subscribing to the issue Chairman Tony Shepherd will sell the majority of his shareholding to the Belgiorno-Nettis family to repay margin lending facilities. The balance sheet is now in better shape. Debt was $644m at June 2008, 90% of which was denominated in US$. The dramatic A$ fall since year end caused the value of debt to jump to $848m. This figure is now reduced to $656m following the institutional equity raising and will fall up to a further $100m through the retail offer. Debt has been refinanced to 2012. A new US$367m debt facility maturing in 2012 has been arranged. We expect net debt/equity to improve from 107% just prior to the offer to 71% at June 2009. Net interest cover should be over four times in FY09 and five in FY10. The next couple of years will be difficult. Lower business activity and capital constraints will reduce the funds available for services companies. Some work will be postponed or cancelled. TSE should survive the downturn in good shape. Profits should still grow, but more modestly than prior expectations. Free cash flow should remain positive and growing. Management reaffirmed AGM guidance for FY09 NPAT growth around 10%. Supporting the outlook is the record $12.3m work in hand, around 80% with government and blue chip companies including Transfield Services Infrastructure Fund. Australian operations will be supported in FY09 by new contract renewals/wins including NSW Housing, BHP Billiton Nickel West and Future Flow, offset by loss of some work with Telstra, completion of other work and reduced TSI Fund success and development fees. Ongoing government funded infrastructure investment provides a supportive backdrop. The weak A$ boosts the translated value of foreign earnings. In North America, the Flint Transfield Canadian oil sands JV will continue to contribute positively. TIMEC refinery work was slowed in 1Q by Hurricane Ike, but a record order book supports the outlook for the remainder of the half. US Maintenance earnings are being hurt by weak retail conditions, part offset by contributions from acquired Horizon & Wheelan and cost cuts. Head office rationalisation will also help reduce costs. We remove the Narrow Moat rating. It is a relatively robust business in Australia with a variety of long term contracts in a range of industries. Much of the work is in essential services or regarded as mission critical, giving the earnings stream a higher degree of repeatability. Little of the firm’s own capital is invested, with labour being the main expense. The position in North America is less robust. A large proportion of work is in more cyclical oil & gas, refinery and retail and there is greater competition. In the case of a significant downturn involving cancellation or non-renewal of significant contracts, earnings may be hit if staff costs are not reduced rapidly enough. We still think TSE is a good business, but we are not sure it can retain high returns on investment covering the cost of funds through all cycles. We conservatively expect only half the Retail Offer to be taken up. It is not underwritten. CEO Peter Watson will leave the company in April 2009 after eight years. There is greater uncertainty over future direction until a successor is appointed. Our discount rate is increased slightly. Our FY09 NPAT forecast drops from $119m to $117m. FY09 EPS falls from $0.60 to $0.38. Some longer term growth assumptions are also modestly reduced. We anticipate 16c dividends this year, providing an attractive 10%+ fully franked yield at a price of $1.80. Fair Value declines from $10.30 to $4.10. The share price is undervalued for higher risk investors on a long term view. We recommend shareholders in this category take up their entitlement should the market price be above the Offer Price.
TSE Price at posting:
$1.83 Sentiment: Buy Disclosure: Held
