No contraction for contractors
Staff reporter, 23 June 2008
A SLOWING Australian economy won’t put the brakes on revenue growth for leading engineering and construction contractors, including United Group, Leighton, Downer EDI and Transfield Services, according to JPMorgan, which sees most upside in the current share price of Transfield.
“Overall, we think the key drivers for revenue growth amongst the Australian contractors remain sound, especially the infrastructure and resources sectors,” JPMorgan said in a new research note on the sector.
“For the infrastructure sector, growth is expected to be driven by the efforts of government to address years of underinvestment, particularly in correcting transport bottlenecks for major export industries. Growth from the resources sector is likely to be driven by the major miners’ plans to maximise production in order to take advantage of record high commodities prices. The strong fiscal position of Australian state and federal governments and the strong balance sheets of the miners’ give us confidence in this outlook.”
The bank said United’s growth would come from continued expansion of its services business combined with double-digit growth from rail and resources, while Transfield’s “northern exposure” – to Canadian oil sands and US refinery maintenance – would drive revenue expansion. It has forecast United Group revenue to climb from an estimated $A3.65 billion this year to $A4.59 billion in fiscal 2010, with Transfield predicted to grow to $A3.79 billion from $A3.03 billion over the same period.
Construction giant Leighton Holdings would also enjoy further strong revenue growth over the next three years, JPMorgan believes (to $A18.43 billion in FY2010), but is forecasting only modest revenue growth for Downer EDI as the group “repositions and rebuilds itself after a sustained period of financial non-performance”.
The macro picture, based on Construction Forecasting Council (CFC) data, has engineering construction spending growing at 15% in FY09 and 5% in FY10 after expanding at a CAGR of 9.6% since 1986-87.
“CFC is forecasting over 30% growth for resources engineering construction in FY09,” JPMorgan said.
“Despite evidence of a slowing Australian economy, we expect continued strength in the Australian infrastructure and resources sectors to lead to higher revenues for the Australian contractors over the medium term.”
JPMorgan’s short-term prognosis for stock prices and total shareholder returns has Downer continuing to disappoint, and Leighton and United returning up to 18% and 17%, respectively.
While risks to the Transfield price target (plus-35%) included an early cyclical downturn in the Australian resources sector, poor integration of acquisitions, contract disputes, loss of tenders and a strengthening Australian dollar, this had to be weighed against a potential shareholder return from here of 42%.
Also in the June 23 - 29, 2008 edition
- COVER STORY
- Laterite nickel the real deal
- EXPLORATION
- Evelyn juts, reveals potential
- FINANCE
- Bonwick casts several lines
- Prophet Vendt lets off some steam over Monarch
- Technology key ingredient in new Cook coal plan
- INNOVATION
- Oh what a feeling ...
- INSIGHT
- Australians idle?
- INTERCEPTS
- Katanga dodges DRC bullets
- Zinc miners should get back to the merger table
- MEDITERRANEAN'S GHOST
- Goliath back ... with an army of lawyers
- PROJECT WATCH
- Kanyika gets initial thumbs up
- ReGENERATION
- 60 seconds with Mat Longworth
- Heron turns bird of prey
- TECHNOLOGY
- Freeport vs Rio in robotic drill race
- Technology not yet on the map
- UnCUT
- Gold, Aditya Birla
- VIEW FROM THE WEST END
- Mining can wait