Bradken: Interim result 2013

Despite a slight dip in revenue, Bradken reported a 9% increase in net profit to $46.7m. From earnings per share of 27.6 cents, up 5%, a fully franked 20 cents interim dividend was declared (ex-date 18 February). Encouragingly, operating cashflow, which is particularly lumpy in this type of business, rose from $10.7m last year to $70.8m.

This was a reasonable result considering over 40% of sales come from the iron ore and coal sectors, both of which have been stung by lower prices and falling investment. Sales in the rail division, which is exposed to both iron ore and coal expansions, fell by 20% compared to this time last year. This was offset somewhat by a marked increase in sales of buckets, tools and crawler systems (used to move heavy equipment). Sales to the gold and copper industries remain strong but may suffer if lower prices prompt a pullback in project expansions. Investors seeking respite from volatile commodity prices won’t find it here.

With a new Chinese foundry now complete and operational, capital expenditures should steadily decline from this year. Assuming maintenance capital expenditures at around $15m, the company generated free cash flow of around $55m, or about 32 cents per share. On a free cash flow basis, the business doesn’t appear to be overly dear. Yet as in much of the sector, the competitive moat is shallow and the company will always depend on favourable cyclical forces for success. It’s one to buy amid fear, at the bottom of the cycle. Although it is one of the better businesses in the sector, for now, we’re recommending you AVOID.