Stock of the Week Transfield Services (TSE)


Transfield Services (TSE) delivers essential services to key industries in the resources and industrial, infrastructure services and property and facilities management sectors. As one of the stock trading recommendations, we believe it is one of the shares to sell.

A leading global provider of operations, maintenance, and asset and project management services, TSE’s operations span Australia, New Zealand, the United States, the United Arab Emirates, Qatar, New Caledonia, South East Asia, India, Chile and Canada.

Like most global equities, TSE’s stock slumped heavily over the course of the global economic downturn. However, unlike many of its peers, TSE has failed to achieve a meaningful stock turnaround in 2009-10.

Though the company continues to win projects, TSE is feeling margin pressure as major Australian companies cut back on nonessential spending and as US markets face volatility.

Whilst TSE recently released impressive 1H10 results, the group’s guidance was less heartening.

TSE has forecast flat FY10 earnings growth on FY09. Considering the fact that most companies are upgrading guidance forecasts on improved global economic conditions, this sluggish forecast indicates TSE sees no major operational improvement on the horizon.

Local Difficulty

In terms of revenue by industry group, 39% of TSE’s revenue is derived from revenue and industrial, 31% from property & facilities maintenance and 30% from infrastructure services.

Transfield Services has worked towards integrating its Australian and New Zealand businesses into one, targeting organic growth through upped service offerings and cross-selling opportunities.

However, whilst Australia and New Zealand contribute the highest global proportion of TSE’s revenues (around 65%), the company is struggling to maintain margins.

This is in spite of signs of an economic recovery in Australia, which unfortunately has not extended to all of TSE’s main operational sectors (resources and industrial, infrastructure services and property and facilities management).

Though TSE notes it is seeing continued growth momentum in the infrastructure sector, the group is facing mixed market conditions across the resources and industrial sectors. This is coming primarily via the constraint of customer spending commitments.

In other words, resource and industrial companies are cutting back on non-essential services, including TSE’s project management services.

TSE is looking to leverage off relationships from government stimulus to secure organic growth. Unfortunately the government is no longer throwing out stimulus packages like confetti, as was the case during the worst of the downturn, and TSE will instead have to rely on self-sufficiency measures.

Difficulty Abroad

Whilst TSE is juggling volatile conditions locally, the group’s exposure to the Americas is also doing it little favours.

TSE acquired TIMEC, a provider of asset management services to the resource and food industries, in early 2007, before the onset of the global financial crisis.

TIMEC is now facing refinery overcapacity, negatively impacting work volumes.

TSE’s other primary US business, US Maintenance, is a provider of outsourced contract management services. TSE admits the division has been hit by a mixed retail sector in the US.

TSE is now looking to the Middle East and Asia as to a stronger growth region to invest in.

Good Results, Poor Outlook

In late February, TSE announced its 1H10 results.

The company revealed earnings rose 33% to $40.1 million, on revenue of $2 billion.

TSE generated record cash flow from operations, and declared a dividend of five cents per share.

The results were evidence of a large range of new projects TSE picked up over the year from abroad and locally.

This includes being selected to construct Australia’s lucrative National Broadband Network project.

Whilst the half results were good, TSE’s outlook guidance is less than heartening.

TSE announced during the results release that FY10 earnings growth will be flat to modest, a forecast that was recently reiterated.

Outlook

Whilst TSE recently released impressive 1H10 results, the group’s guidance was less heartening.

TSE has forecast flat FY10 earnings growth on FY09. Considering the fact that most companies are upgrading guidance forecasts on improved global economic conditions, this sluggish forecast indicates TSE sees no major operational improvement on the horizon.

Though the company has declined to elaborate on these challenges, a deeper look into TSE’s operations and sectoral issues paint a clearer picture.

The group is facing margin pressure as its Australian and New Zealand exposure is being hurt by resource and industrial companies cutting back on non-essential services, including TSE’s project management services.

TSE is hoping to leverage off relationships from government stimulus to secure organic growth, though owing to signs of economic growth it seems unlikely the Australian government will throw TSE a stimulus lifeline in the foreseeable future.

TSE is also facing challenges in its Americas exposure, particularly via a struggling retail sector. Such challenges are evident in recent US data, which has confirmed a slowdown in US consumer spending and potentially rising unemployment.

The share price for TSE has shown weakness, declining 30% since October last year. However, there remains continued selling pressure on TSE with the share price last settling at $3.30.

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