##{"id":59680,"date":"2012-03-20T12:54:15","date_gmt":"2012-03-20T01:54:15","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/03\/20\/valuation-the-stumbling-block-for-campbell-bros\/"},"modified":"2012-03-20T12:54:15","modified_gmt":"2012-03-20T01:54:15","slug":"valuation-the-stumbling-block-for-campbell-bros","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/03\/20\/valuation-the-stumbling-block-for-campbell-bros\/","title":{"rendered":"Valuation The Stumbling Block For Campbell Bros"},"content":{"rendered":"

\n\t – Campbell Brothers expands food and pharma<\/span> testing services
\n\t – Acquisitions small relative to the group's reach
\n\t – Leverage to minerals testing still a concern for some
\n\t – Hold ratings dominate on valuation grounds<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tAcquisitions have long been a part of the growth strategy for Campbell Brothers ((CPB<\/span>)) and this trend has continued with news of the purchase of two small UK food and pharmaceuticals testing services, Eclipse Scientific Group and Advanced Micro Services.<\/p>\n

\n\tThe deals will cost Campbell Brothers $39 million, with management expecting to fund the deals from existing cash balances and debt facilities. The capacity for such deals is in place, as JP Morgan notes Campbell Brothers as at 30 September last year had group gearing of 29.2% against a target of 30-40%.<\/p>\n

\n\tWhile the acquisitions are small relative to overall operations at Campbell Brothers, JP Morgan is positive as the company continues to expand the earnings contribution from non-Minerals exposure. Longer-term there is some upside potential from the new assets, as Deutsche Bank notes management at Campbell Brothers has indicated the global food and pharma<\/span> testing market is similar in size to the global minerals testing market.<\/p>\n

\n\tThe fact Campbell Brothers continues to expand into other markets is significant in the view of BA Merrill Lynch, as the broker takes the view the market is preoccupied with the cyclicality<\/span> of earnings in the minerals testing business.<\/p>\n

\n\tAs BA-ML notes, Campbell Brothers is a leader in industry consolidation and continues to expand into new sectors and geographies through both organic growth and acquisitions. This supports the view earnings for Campbell Brothers are likely to be higher than the market is currently expecting.<\/p>\n

\n\tOn BA-ML's forecasts, Campbell Brothers should generate earnings per share (EPS) of 318c<\/span> this year and 432c<\/span> in FY13<\/span>, with a further increase to 482c<\/span> in FY14<\/span>. This compares to consensus EPS forecasts according to the FNArena<\/span> database of 312.4c for FY12<\/span> and 368.4c for FY13<\/span>.<\/p>\n

\n\tAmong the more cautious from an earnings perspective is JP Morgan, who points out the majority of group earnings continue to be generated by the ALS Minerals division. The issue for the broker is this division remains highly leveraged to cyclical minerals exploration. <\/p>\n

\n\tGiven this cyclical risk, JP Morgan argues the current share price is factoring in too much upside and so doesn't fairly reflect the risks associated with the potential for earnings to fluctuate. Given this, JP Morgan retains an Underweight rating on the shares.<\/p>\n

\n\tWhile retaining a Neutral rating, BA-ML has adopted a more positive stance with respect to the potential for upside risks to earnings forecasts. Valuation is the stumbling block to an upgrade in rating from BA-ML, as despite rolling forward its price target to $60.50 from $51.00 the share price remains above the broker's target.<\/p>\n

\n\tDeutsche Bank agrees Campbell Brothers is a Hold at current levels, as given a forecast FY13<\/span> earnings before interest and tax multiple of around 12 times on the broker's numbers the risk-reward appears balanced at current levels. A strong outlook for minerals exploration activity has seen Deutsche raise its price target to $60.00 from $51.50.<\/p>\n

\n\tThe changes mean the consensus price target for Campbell Brothers according to the FNArena<\/span> database now stands at $57.02, up from $53.11 previously. The database shows Campbell Brothers is rated as Buy once, Sell once and Hold four times. <\/p>\n

\n\tThe Buy comes courtesy of Macquarie, who takes the view while Campbell Brothers looks expensive at current levels, the premium is justified given the outlook for further strong earnings growth in coming years.<\/p>\n

\n\tShares in Campbell brothers today are weaker and as at 12.35pm the stock was down 33c<\/span> at $62.68. This compares to a range over the past year of $38.24 to $63.40 and implies downside of around 9% relative to the consensus price target in the FNArena<\/span> database.<\/p>\n

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