Economic soft patch could bring glum company outlook

The domestic economy has hit another soft patch over the past four months as the nation prepares to go to a federal election in September. This has resulted in a long list of earnings downgrades from a range of sectors. It could also mean many companies will have a glum outlook when they report their full-year earnings in August.

MaxiTrans Industries

The truck trailer manufacturer has shot the lights out in recent times, with earnings rocketing and the share price climbing 761 per cent from a low of 18¢ in May 2011 to a recent high of $1.545 in March 2013.

In the past three months, though, the stock has peeled off and now sits at $1.17 a share. The company has a top-shelf managing director in Michael Brockhoff. However, it is acutely exposed to the machinations of the economy.

MaxiTrans booked a net profit of $12.8 million, or 6.97¢ a share, for the six months to December 2012. At the time the company said its order book was strong right through to June 2013 and as a result it was looking to double the stellar first-half result. If it achieves the full-year forecast the company would earn just under 14¢ a share, placing it on an attractive 2013 price-to-earnings (P/E) ratio of 8.5 times.

MaxiTrans has a stable parts business but the bulk of earnings are generated from the supply of trailers to the resources, agricultural and food industries. All of these areas can quickly change their capital expenditure budgets. Even if the company can manage to avoid lowering its estimates for the year to June 2013, the uncertain economic conditions reduce the likelihood it can repeat the 14¢ a share.

Saunders

International

The industrial tank builder bucked the trend this week and announced some pleasing profit numbers in its June update. The company said it expected to earn a net profit of about $5.6 million for the year to June 30. This represents a 24 per cent increase on the previous year on the back of a 30 per cent jump in revenue.

This all sounds positive. However, the $5.6 million net profit includes an $800,000 net gain from the settlement of a legal dispute. So the actual net profit number for 2013 is $4.8 million, representing a more modest 7 per cent growth. The picture gets less rosy again if we acknowledge that in 2012 the net profit number was understated because of one-off legal expenses. So we are looking at a company that has 30 per cent revenue growth in 2013 and no earnings growth.

So what does that mean for Saunders? The company has a market value of $54 million. Once you take into account the $14 million of cash on the balance sheet then you are paying $40 million for the operating business. If the company can retain its hard-fought revenue growth and stabilise profit margin in 2014 then the company is trading on a P/E multiple of about 8.5 times. This could create a buying opportunity if it gives a positive outlook statement when it reports its full-year result.

AVJennings

One area of the market that remains attractive is the residential property development market. We have previously talked about Sunland, Villa World and Devine as looking attractive. Another one in this category is Melbourne-based AVJennings.

In April, AVJ raised fresh equity through a rights issue at a big discount to stated net asset backing (NTA). The $41 million issue diluted the NTA from 90¢ a share to just 74¢ a share. The shares are now trading at 44¢ a share, a 40 per cent discount to the new NTA.

Hardly the stuff shareholders want to hear. However, the capital raising was accompanied by a new banking facility that provides the company with the firepower to dramatically escalate the development of its property lots.

We can also assume the Victorian property market, after two dreadful years, might be finding a bottom as mortgage rates fall. In this environment I can see AVJ trading up to 60¢ a share, a discount of about 20 per cent to its NTA.

matthewjkidman@gmail.com

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