by
Alen Golubovic | Sep 09, 2014
Key points:
- Group underlying EBITDA in FY14 beat analysts' expectations, rising 7% to $217m, while pre-tax profits of $59.2m were also higher than consensus forecasts. The results reflect better than expected divisional earnings – 43% of Transfield’s EBITDA comes from the Defence, Social and Property, so the overall company results have been able to absorb the negative impact of the mining downturn.
- Transfield has been able to both lengthen the average maturity of its debt, as well as moderately improve its debt metrics in FY14.
- With an indicative yield to maturity of 6.95% pa, Transfield’s May 2020 US dollar bond offers high yielding returns from a broad based, well-diversified business profile across a range of industries. The high yield is a reflection of the sub-investment grade rating and suits investors who are willing to accept the higher financial leverage profile of Transfield as part of the higher yield consideration.
Summary of FY14 Results
Transfield Services (ASX: TSE) posted its FY14 results to the market on Friday. The results reflect better than expected divisional revenues – 43% of Transfield’s EBITDA comes from the Defence, Social and Property, so the overall company results have been able to absorb the negative impact of the mining downturn.
- Group revenues rose 1.4 per cent to $3.75 billion. Transfield did not pay a final dividend
- Group underlying EBITDA in FY14 beat analysts' expectations, rising 7 per cent to $217 million, while pre-tax profits of $59.2 million were also higher than consensus forecasts
- Transfield has given a firm forecast for fiscal 2015 earnings before interest taxation depreciation and amortisation (EBITDA) of between $240 million and $260 million. Most large engineering and contracting companies, including WorleyParsons, have refrained from giving specific targets this year
- Underlying EBITDA in Transfield's Australian and New Zealand infrastructure business rose 25 per cent to $165 million
- Transfield has been less exposed to the slump in commodity prices than some of its contracting peers, because only about 6 per cent of its group revenues are derived from mining. But EBITDA fell 10 per cent in its resources business to $71 million and slid 78 per cent to $6 million in its American business
- Transfield's net profit from continuing operations of $66.4 million was within its own forecasts, a significant improvement on the prior year's loss of $244 million, while net debt fell $8 million to $534 million. Net Debt to EBITDA down from 2.7x in FY13 to 2.4x in FY14
- Transfield's debt levels are still relatively high, running at 41% (down from 43% in FY13), and operating cash flow before interest and tax fell to $116.7 million from $249.9 million a year earlier. However, after adjusting for normalisation in trade creditors, normalised operating cashflow in FY14 is $234.2m
- Long term gearing targets on 25%-35% and Net Debt / EBITDA < 2.0x
- Investors have been worried that Transfield might need to raise equity to reduce debt, yet those concerns have eased following a debt restructure in May
Diverse Business Profile
The diversity in Transfield Service's operations reduces its exposure to single event and counterparty risk. Transfield Service's top 20 contracts collectively represent less than 50% of its total revenue. The spread of its contract exposure reduces its exposure to counterparty risk as well as the weaker than expected performance in a particular contract. While Transfield Service's America's segment and the mining related business, particularly in the Easternwell business, have underperformed in the last two years, growth in its infrastructure and energy business has allowed the company to maintain a relatively stable revenue profile over the period.
Transfield Services predominantly `unit-based' maintenance service contracts offer greater protection against material cost blowouts or time delays that are more commonly associated with fixed price contracts for its construction projects
Relative Value
The chart below shows the historical indicative offer yield on Ausdrill, Transfield and Fortescue. Unlike Ausdrill and Fortescue, two comparable USD bonds with mining exposure that reported better than expected results to the market, the margin on Transfield’s bond has remained relatively firm post results announcement, which is particularly interesting given the 24% jump in share price. As noted above, Transfield is less exposed to the mining sector, with only 6% of revenues and 5% of EBITDA being generated from mining services.
While Ausdrill does offer a higher yield, Transfield Service's modest exposure to the mining industry is the key differentiating factor relative to the Ausdrill. Despite Transfield Service's higher financial leverage, it benefits from a predominantly infrastructure and public sector customer base and a wider industry footprint, which in turn reduces the risk of a step-reduction in revenue driven by a moderation in commodity prices. Therefore, Transfield may suit investors who are willing to accept a lower yield to Ausdrill but are seeking a more diversified business exposure outside of the mining sector.
Source: FIIG Securities
Margins represent indicative offers. Subject to availability.
With an indicative yield to maturity of 6.95% pa, Transfield’s May 2020 US dollar bond offers high yielding returns from a broad based, well diversified business profile across a range of industries. The high yield is a reflection of the sub-investment grade rating and suits investors who are willing to accept the higher financial leverage profile of Transfield as part of the higher yield consideration.
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