Overdone, page-48

Titan Energy Downgrade Crushes Confidence FNArena News - October 07 2014 -Slowdown sharper than expected -Competition intensifies -

Long-term value being ignored By Eva Brocklehurst

Titan Energy Services (TTN) has substantially downgraded guidance two weeks after reiterating earnings forecasts for FY15. The downgrade materially dented market confidence and brokers believe it will take some time for the stock to recover. The reasons for the downgrade may be legitimate - room contract terminations and delays - but the market is now very sceptical about the future, in Bell Potter's view, and the time is ripe to step back and await developments. The company's comments surrounding the outlook for the CSG to LNG sector were sobering, hence the broker considers peak conditions for Titan Energy have passed and competition will only intensify.

Updating earnings forecasts to account for the new guidance and deteriorating outlook means Bell Potter's estimates are reduced by 56% for FY15 and 64% for FY16. Target drops to 60c from $2.99 and the rating is downgraded to Hold from Buy, because of the timing and magnitude of the earnings adjustment. The broker appreciates the inherent value in the stock, should it deliver, but confidence remains very diminished. Titan Energy provides energy and infrastructure services to the CSG and associated industries and operates in four segments. These include drill rigs, camps, catering and equipment hire. In Bell Potter's view, further risks could emanate from the loss of key customers, a material downgrade to the oil and gas sector, particularly CSG to LNG and, despite the company's stated strategy of expanding into new geographies, a lack of experience in new markets where there is both risk and opportunity. Morgans was also taken aback by the downgrade, the extent of which probably means Titan Energy will take a back seat until confidence returns. The share price reaction was severe and the market cap has now shrunk to under $30m, which Morgans believes may make it difficult for some investors to consider the stock. Earnings guidance for FY15 has been downgraded to $10-12m from the prior forecast of $21m, driven predominately by the loss and non-renewal of two contracts, with 212 rooms terminated early and a 183-room contract concluded. Two significant tender decisions have also been deferred to the second half of FY15. Some of the impact stems from the maturing of the market, with a shifting of focus to operations from construction. Morgans was aware that, as work in Gladstone started to ease, competition would increase, but the speed of the slowdown surprised the broker.

Morgans has downgraded FY15 and FY16 earnings forecasts by 64% and 20% respectively. On the positive side, the balance sheet remains in reasonable condition and cash flow should stay high enough to service debt and working capital, in the broker's opinion. Still, given the lack of earnings visibility and credibility near term, long-term value is likely to be ignored. Morgans downgrades to Hold from Add and acknowledges the investment risk has increased substantially. Target drops to 60c from $2.50.