Stock of the Week Bradken (BKN)

Bradken (BKN) is a leading supplier of consumable parts, capital equipment and associated maintenance and refurbishment services to the resources and freight rail industries.

The company’s five divisions are mining products, rail, power and cement, engineered products and industrial.

The company suffered from a volatile environment over 2008, as the commodities bubble burst and the stock market worried over demand for BKN’s services.

BKN has seen signs of improvement in 2010 on a turnaround for miners and iron ore prices, improved order intake levels and strength in its rail division.

The company is also excited over its acquisition of Almac, which will offer BKN access to new wear products in the growing Western Canadian oil sands, coal and hard rock mining market.

BKN recently impressed the market when it upgraded its FY10 underlying earnings guidance (EBITDA) to be in line with, instead of below, FY09 EBITDA.

Iron ore awe

A turnaround for miners and commodities has seen BKN showing signs of decided strength over 2009 and into 2010.

The spot price of iron ore has traded significantly above the benchmark for a while now. A shift away from the traditional benchmark pricing of ore has transpired, resulting in an indexed system that more closely reflects market movements during the year.

Demand from China and restocking in the developed world has driven the recovery seen in commodity prices.

Last week, iron ore major BHP Billiton (BHP) delivered another record in West Australian iron ore production, with the miner’s iron ore and metallurgical coal production up 16% in the June quarter from the same period a year ago.

Iron ore sector peer Fortescue Metals Group (FMG) confirmed mid-month that it ran its West Australian mines, railways and ports harder than expected last quarter to benefit from the most of near-record iron ore prices.

Boom times for iron ore and increased sector activity is beneficial for BKN, which is sure to pick up more work owing to sector strength.

BKN also stands to benefit from increased activity in the coal sector, with major miners BHP and Rio Tinto (RIO) in late May bidding on Queensland’s coal rail track network.

BHP views coal as a lucrative place to be at the moment. The miner is reportedly seeking a 10% increase in the price of coking coal for the July-September quarter, to roughly $225 per tonne.

Almac on board

A couple of months ago, BKN agreed to acquire the business assets of Canadian-based Almac Machine Works for $51 million. BKN confirmed the acquisition went through on 12 July.

Almac manufactures and supplies a range of products and services primarily to the Canadian oil sands, mining and conventional oil and gas markets. Canada has the world’s second largest proven oil reserves at 175 billion barrels, trailing only Saudi Arabia, with 96% of that being Alberta oil sands.

The new business will be managed from within the Resources division of the US based Engineered Products division and is expected to drive synergies amounting to $0.5 million per annum.

The acquisition price of $51 million represents 5.0x normalised CY09 EBITDA of $10.3 million. The acquisition is funded by a $50 million capital raising, and is expected to be approximately 3% EPS accretive in the first full year after the acquisition.

Almac is expected to report normalised revenue of $55 million and normalised EBITDA of $13.3 million for the year ending 31 December, 2010.

Recent financials

On 9 February, BKN reported its 1H10 results, impressing the market.

BKN clocked a net profit after tax for its December half of $25.7 million, a 26% decrease on the same half in the prior year.

Operating earnings were up on guidance but down 22% on last year to $70.7 million whilst EPS decreased 30% to 19.8 cents per share.

BKN declared a half dividend of 13 cents per share, up 30% on the prior year.

BKN’s Rail division delivered sales growth of 21% in 1H10 compared to 1H09 as the group saw continued strong market demand for freight wagons.

BKN worked hard over 1H10 to reduce its costs and raise its cash flow. Operating cash flow for the half of $81.8 million was 54% higher on year due to reduced working capital and lower capital expenditure.

The strong cash performance enabled a reduction in net debt of $72 million from June 2009 to $326.3 million at December 2009.

BKN’s gearing is sound, with net debt at 2.19 times EBITDA.

Improving outlook

Along with news of the Almac acquisition, BKN upgraded guidance provided at its 1H10 results in February, with FY10 EBITDA now expected to be in line with, instead of slightly below, FY09 EBITDA.

BKN’s Rail division is expected to deliver a strong performance through continued productivity improvements at the Xuzhou operations as well as ongoing purchasing gains.

All other divisions continue to improve, in line with expectations.

BKN remains comfortable with the outlook for the core business, with signs of recovery in the US-based Engineered Products Division.


Even back when BKN forecast FY10 to be down slightly on FY09, the market was still expecting a decent full year result owing to improved market conditions.

This was confirmed by the company itself when it recently upgraded its FY10 underlying earnings guidance to be in line with, instead of below, FY09 EBITDA.

BKN stands to benefit significantly from forecast skyrocketing iron ore prices, as it is closely tied to miners and the iron ore sector.

A big boon going forward will be BKN’s acquisition of Almac, which will provide the company with access to new wear products in the growing Western Canadian oil sands, coal and hard rock mining market.

BKN has also seen order intake levels rise and expects particular strength from its rail division, which performed strongly over 1H10.

BKN may even beat its FY10 guidance, as it recently beat underlying earnings guidance for 1H10.

Therefore it will be one of the stocks to watch in coming months.

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