Investors have breathed a sigh of relief that engineering group, Bradken has managed to make its reduced guidance in the first half of 2007-08.
The shares ended 90c higher yesterday, or more than 13% at $7.63 after Bradken slightly exceeded the reduced guidance given on December 13.
In the six months to December 31, Bradken said earnings before interest tax, depreciation and amortisation (EBITDA) was up 14% to $53.6m and Earnings Per Share rose 2% to 21.9 cents.
Net profit after tax and minorities was $23.2m, up a mere 2% increase over the previous corresponding period.
In the December 13 statement, the company said "We anticipate that EBITDA for the six months to December 2007 will be up around 12%, up on the corresponding period last year, with Profit after Tax relatively flat. For the full year, we expect EBITDA growth of around 20% and EPS growth of around 15%."
Managing Director Brian Hodges said, "The results are slightly better than the guidance given in December 2007".
But there doesn't seem to be much news in the commentary that would lift hopes of the company doing better in the second half. Interest costs are rising because working capital is up on expansion deals, margins are under pressure in the Chinese rolling stock business, there are delays to some contracts forecast and costs are up.
As well the power and cement business, where a dud contract cut earnings, is expected to return to normal trading in the current half, which was probably the good news noticed by the market yesterday.
But for now the company isn't changing course.
"Bradken's long term strategy remains unchanged. We believe the long term mining production expansion in Australia will continue as each bottleneck is removed. Our work on margin growth continues to deliver improved performance through capital investment, the deepening of the value add to our customers and by way of further vertical integration," Mr Hodges said in the statement
"We maintain capacity to expand through aligned acquisitions in Australia and overseas. In a period of higher interest rates and tightening credit, we anticipate there may be some downward adjustment in acquisition values."
"The next period will see increasing costs and tightness in the labour market, which our current programs are addressing.
"Our overheads, while on plan, have increased ahead of recent growth levels and will be restrained in the short term to enhance profitability."
"Power & Cement is expected to return a normal level of profitability in the second half as the completion of the unprofitable contract, from product already made in Australia, will not impact on its capacity to complete orders from its significant order book.
"In addition, we are expecting growth in mine production volumes and demand from infrastructure projects delayed from the first half. A full six months contribution from recent acquisitions and associated synergy benefits will also provide impetus in the second half of this financial year."
"We therefore maintain our previous guidance for the full year and expect EBITDA growth of around 20% and EPS growth of around 15%."
"The poor performance of the Power & Cement Division, whose capacity was absorbed by a large but unprofitable contract, accounted for well over half the impact on EBITDA in the HY08 compared to previous market expectations.
"The balance of the impact on EBITDA was due to the effect of lower than expected mining volumes on the Mining and Mineral Processing Divisions. Higher interest costs due to increased interest rates and higher levels of borrowings further suppressed the growth in profit after tax."
Excluding the recently acquired Power & Cement Division, the remaining business continued to grow the EBITDA margin, which was 16.4% compared with 16.0% in the previous corresponding period.
The Directors declared a fully franked interim dividend of 15.0c per share, an increase of 3% over last year. In response to shareholder feedback, the Dividend Reinvestment Plan (DRP) has been reactivated and the dividend will be payable on 10 March 2008 with a record date of 18 February 2008. The equivalent number of shares issued under the DRP will be acquired on market so as not to increase the total number of shares in the Company.
At June 30 the DRP "remained suspended' and there was no sign of re-opening it, so the downturn in performance and rise in working capital has forced the DRP to be reactivated to try and get shareholders to help the company raise cheap capital at a time when credit is tight and money more expensive.
Since June 2007 Bradken has completed the acquisitions of TMS Engineering in Tasmania (TMS), Roll Neck Rings in the United Kingdom (RNR) and 75% of Cast Metal Services in Queensland (CMS).
"TMS and RNR are machine shops, purchased to bring external machining in house and relieve machining capacity issues. Both businesses are now integrated into their local foundry operations. The acquisition of 75% of CMS, will provide an opportunity to realise significant internal synergies with Bradken. The establishment of a trading business in China will also provide access to goods, for the benefit of all current and future customers of CMS," said Mr Hodges.
Recent acquisitions, including those that were not owned for the full six months to December 2006, accounted for an increase in EBITDA of $3m in HY08, with all acquisitions trading in line with or better than expectations held at the time of purchase.
AmeriCast, in which Bradken holds a 19% equity interest, has been trading well and has successfully integrated Atlas Castings & Technology, the number two player in the US for large, mission critical steel castings, which was acquired in April
