Transfield Services Limited - Analysis of gearing regarding...

Transfield Services Limited - Analysis of gearing regarding capital raising
rumour
Last Traded: $4.60 Market Cap: $959 Sector: Utilities
Summary of
report dated
/11/08
BUY / OUT PERFORM Valuation: $0/42
The AFR Street Talk column reported that TSE is rumoured to be considering a capital
raising in the order of "several hundred million dollars".
The company has confirmed that its covenants include one based on Net Debt /
EBITDA, but it has not disclosed the ratio at which the covenant is breached.
TSE reported Net Debt / EBITDA of 2.74x in the FY08 result, below its internal target of
3x. It noted that the balance sheet was "sound".
We have recalculated TSE's FY09 Net Debt / EBITDA using current exchange rates.
This yields a Net Debt / EBITDA of 3.8x, well above TSE's internal target.
We expect management's internal target would be set well TSE's banking covenants.
�� assuming a 4.0x covenant, an AUD/USD sustained at ~0.64x could trigger a
breach.
�� assuming a 4.5x covenant, an AUD/USD sustained at ~0.55x could trigger a
breach.
Clearly if these assumptions are correct then the AUD/USD has already visited/gone
close to levels where a covenant breach could occur. TSE is quoted in the AFR that it
has not breached any of its covenants.
At current exchange rates:
�� A capital raising of ~$175m would be required to return TSE's Net Debt / EBITDA to
its internal target of 3.0x.
�� Assuming a range of issue discounts to the current share price of $5, FY09 EPS
would fall by 11.3%-14.9% and the DCF valuation would fall by 8.8%-13.5%.
This yields a Net Debt / EBITDA of 3.8x, well above TSE's internal target.
We expect management's internal target would be set well TSE's banking covenants.
�� assuming a 4.0x covenant, an AUD/USD sustained at ~0.64x could trigger a
breach.
�� assuming a 4.5x covenant, an AUD/USD sustained at ~0.55x could trigger a
breach.
Clearly if these assumptions are correct then the AUD/USD has already visited/gone
close to levels where a covenant breach could occur. TSE is quoted in the AFR that it
has not breached any of its covenants.
At current exchange rates:
�� A capital raising of ~$175m would be required to return TSE's Net Debt / EBITDA to
its internal target of 3.0x.
�� Assuming a range of issue discounts to the current share price of $5, FY09 EPS
would fall by 11.3%-14.9% and the DCF valuation would fall by 8.8%-13.5%.