Transfield Services Limited: Price target lifted, retain ACCUMULATE Last Traded: $2.62 Market Cap: $935M Sector: Industrials Summary of report dated 12/06/09 ACCUMULATE / MARKET PERFORM Valuation: $3.85 What¡¦s new? CommSec has increased its TSE Price Target to $3.15 (previously $1.92). This assumes that TSE trades at a 30% discount to the market FY10 PE of 15.1x. What factors contributed to our Price Target increase? TSE¡¦s share price has run well past our previous Price Target and numerous factors, outlined below, provide justification for our revision. „o Greater certainty surrounding TSE¡¦s leadership following the announcement of the new CEO Peter Goode in March 2009. However, TSE is yet to provide an update on its business strategy, particularly with respect to its North American businesses. We expect to hear more about the strategy at TSE¡¦s FY09 results in August. „o Continued wins/renewals evidenced by $300m+ in 2H09 for Australia alone. TSE is also benefitting from the Federal Government¡¦s stimulus package in the areas of rail, schools and public housing. „o The general market recovery observed since March 2009. „o Our increasing confidence that the Yarra Trams JV will retain the Melbourne trams franchise. TSE is competing with the Downer EDI /Keolis consortium, however we believe that the latter¡¦s best chance of winning is on the trains franchise. TSE¡¦s operational performance on the trams has been superior to MainCo¡¦s (Connex/United Group) performance on the trains franchise. We expect an announcement on these franchises within the next month or two. „o The recovery in oil prices which has improved the outlook for Canada¡¦s oil sands expansion. WTI has increased from USD 30/bbl in December 2008 to around USD 70/bbl currently. TSE is not involved in the construction of oil sands plants but instead maintains the plant once built. The FT Services JV is forecast to contribute 12% of TSE¡¦s NPAT by FY12, compared to an estimated 5% in FY08. We acknowledge that the credit environment, while slowly improving, will remain a constraint on capital expenditure in the region. „o There are other key contract renewals to watch for, including the Chorus contract (worth $100m pa in revenue, due mid 2009) and the Woodside contract (due later in 2009). Investment view We have also updated our earnings forecasts to incorporate changes in CBA Economics¡¦ currency forecasts. CBA forecasts the AUD/USD to appreciate to 0.90 by September 2010. This will reduce the reported earnings from North America, however given that TSE has a natural hedge via its USD and NZD debt, the changes to EPS are immaterial (<1%). While we continue to see value in TSE, in light of earnings risk in the resources and industrial sector along with some ongoing uncertainty associated with TSE¡¦s business strategy and contract renewals, we elect to retain our ACCUMULATE MARKET PERFORM recommendation. Our DCF valuation of $3.85 is up 12 cents reflecting DCF roll forward and mark to market of TSE¡¦s stake in Transfield Services Infrastructure
TSE Price at posting:
$2.58 Sentiment: Buy Disclosure: Held
