Bradken Limited (BKN) Stock To Sell


Bradken Limited (BKN) manufactures and supplies industrial products and maintenance services to the mining minerals processing rail and industrial markets.

The company’s products include ground engaging tools, mill liners, crusher liners, freight wagons, bogies wear plates, crawler systems, along with mining services and rail maintenance. BKN’s five divisions are mining products, rail, power and cement, engineered products and industrial.

FY12 results

BKN’s FY12 results did not really surprise the market too much given it downgraded guidance in late April. NPAT for FY12 was $100.5 million, a 15% climb on the FY11 result.

Sales over the 12-month period jumped by 26% to $1.45 billion. Earnings per share actually decreased over the year from 60.7 cents, to 60.5 cents, as the company expanded its capital base.

The most worrying aspect about BKN’s results was the decline in margins. EBITDA margin decreased from 17.07% to 14.93%, a significant move and the first contraction since 2009.

Commodity prices and the mining industry

The above chart shows the Commodity Price Index (CRB Index), which comprises 19 different commodities and represents broad commodity price trends.

The CRB index clearly shows a decline in commodity prices over the last six weeks. How does this affect BKN? In FY12, 78.2% of the company’s sales came from resources related companies.

As commodity prices decrease new mining projects and expansion plans become less viable, which in turn leads to less capital expenditure, which ultimately hurts BKN.

The correlation between BKN (green line) and the CRB index (white line) is evident in the above chart.

Outlook

BKN’s FY12 results may not have looked bad on the surface, but were beginning to show some worrying signs.

Declining margins are a real concern especially in the current environment where increased competition is likely to lead to all contractors having to lower their bid prices to get any work.

The group reframed from giving qualitative or quantitative FY13 guidance during the release of its FY12 results or at its AGM.

This is usually a worrying sign, because if they had good results they would be inclined to mention them either with specific numbers, or at least comment on whether the results would be similar to the previous period.

The correlation between the CRB index and BKN is unmistakable; and given the future uncertainty surrounding the US elections and the US ‘fiscal cliff’, we see more commodity price weakness on the horizon and thus a further deterioration in the BKN share price.

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