Foster's recent note...INVESTMENT HIGHLIGHTS:· Completes Debt...

Foster's recent note...

INVESTMENT HIGHLIGHTS:

· Completes Debt Restructure: The company completed its debt restructure last week with USD325m of senior unsecured notes issued in the United States, maturing in 2020, with a further $400m of domestic syndicated bank facilities maturing in 2017. Under the restructure there will be a 150bps increase in debt costs, which the company expects will be offset by future debt and overhead cost reductions. The key is the additional funding headroom that the restructure creates, removing any near term requirement for an equity raising. Some short term selling may be taking place as US Bond Holders hedge their positions by going short TSE, providing a buying opportunity.

· Full Year Guidance in the Bag The Company re-affirmed its FY14 earnings guidance of $65-70m NPAT pre-amortisation. It is important to note that this number does not exclude 1H14 restructuring costs of $7.9m.

We expect the company to deliver at the top end of this guidance range giving FY14 NPAT pre amortisation and NRI’s of circa $78m.

· Outlook Improving: We see an improving operating environment for the company’s public and social services, infrastructure, and oil and gas divisions. The change of government had stalled the NBN rollout which has
now re-commenced. There also appears to be potential upside from contracts such as with the DIBP on Nauru & Manus, where contract extensions and additional scope of works looks likely. Oil & Gas contract revenues are becoming more predictable as domestic LNG projects transition from development stage to production. Previously deferred
federal government service contracts also look to be coming to the market in FY15, with TSE the preferred bidder on $2.5 billion of potential work.

· Gearing to Reduce: We expect a steady reduction in gearing levels, as low capex and ongoing cost reductions assist strong cash generation. We also expect a significant improvement in working capital at 30 June. The company also has circa $200m of potential asset divestments which could
reduce borrowings over the medium term.

· Stock Still Cheap: On our numbers TSE is trading at 7.3x FY14 NPAT (pre amortisation and NRI’s), dropping to 6.5x FY15. This compares to a weighted average FY15 PER of 16.6x for the Commercial Services & Supplies Sector and 10.7 x for most comparable peer DOW

RECOMMENDATION:

· We recommend TSE as a TRADING BUY with a price target of $1.50/share or 10.0 times FY14 underlying NPAT pre-NRI’s & amortisation.

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