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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": Watpac Ltd
December 3, 2007
Tim Morris, wise-owl.com analyst
Stock: Watpac Ltd
Recommendation: BUY
Code: WTP
Market Cap: $608m
Watpac Ltd is an Australian company engaged in property development, construction and project management. The company has a history dating back to 1955, and listed on the stock exchange in 1985. From its Queensland home the company has grown strongly over the last decade, with earnings per share rising at an annual compound rate of 36% over the past 10 years. Responding to this impressive earnings growth has been Watpac’s share price, which over the same period has achieved an accumulation performance of 1455%, as opposed to 355% for the broader market.
In its home state of Queensland, Watpac has a strong reputation, with a client base that includes State Government Departments, the Australian Defence Force, Hospitals, and Universities. The company has been responsible for landmark developments such as Suncorp Stadium, Brisbane Cricket Ground (the "Gabba") and the recently completed White Water World theme park adjacent to Dream World on the Gold Coast.
Watpac’s Queensland Construction operations are currently the largest contributor to the bottom line, generating $25m, or over 60% of the company’s pre tax profit of $39m. Demand in this market should continue to be underpinned by favourable migration flows, strong government infrastructure spending and the ongoing commodities boom.
The Queensland Government has $3bn worth of infrastructure spending flagged for the next few years including a $1.2bn Gold Coast Hospital, a $500m Gatton prison, and a $700m Qld Children’s Hospital. Securing one or more of these projects would substantially boost Watpac’s forward order book, which at June 30 already sat at a record $970m, 73% heavier than 12 months earlier.
Watpac’s forward order book is at record levels. Source: Watpac.
Queensland construction operations make up more than half of this work in hand, however the strongest growing contributor to Watpac’s construction order book has come from NSW. Watpac entered the NSW market in 2004 through the acquisition of Grant Construction. The operation has since been renamed ‘Watpac NSW’ and forward orders have quadrupled from around $100m to over $400m over the last financial year.
Although this growth may seem surprising given the weak state of the NSW property market, it has been possible because of the low cost nature of Watpac’s NSW operations. Low cost providers tend to thrive in soft markets as they take market share from higher cost rivals that fall victim to cyclical downturns. The focus on growing market share seems to have come at the expense of profitability in the short term as the before tax profit margin of the NSW construction division was less than 1% in the last financial year, compared to over 6% for Watpac’s Qld business. However as a firm presence is established in the state, the divisions relative contribution to the bottom line should improve, especially if the NSW property market was to pick up.
A change of fortunes in NSW is unlikely any time soon; however the NSW governments’ recent commitment to spend $40bn on infrastructure over the next 5 years is a positive sign for medium term.
With most of the early grunt work in developing their NSW construction operations now behind them, Watpac is aiming to extend its reach further down the eastern seaboard, and is currently looking for acquisition opportunities in Victoria.
In addition to domestic expansion Watpac carries an exciting ‘X-factor’ in their growth strategy through their Vietnam operations. As it was only established earlier in 2007, the Vietnam office has yet to secure any contracts, however the time has been spent reviewing projects. Four have since been short listed and the company is now conducting final reviews on whether to proceed with development.
Our confidence in the company’s ability to realise these growth ambitions stems from their historical track record, which has seen them grow profits each year for the last 13 years. The most recent period was no exception. Annual revenues rose 29.8% to reach $645m in the year ending 30 June 2007 from $490m in the prior year. EBITDA rose 61.4% to reach $45.4m, EBIT rose 62.5% to reach $43.9m and NPAT rose 50% to reach $27.1m.
The company recently conducted a $59m capital raising designed to shore up the balance sheet and provide the financial firepower for acquisition opportunities. Given that the number of shares on issue was increased by 9.5% there will be some dilutionary impact on earnings in the year ahead. However the raising effectively boosted Watpac’s net asset position from 140.2m to 197.9m, which will permit the NSW and Qld construction divisions to annually undertake $2.7bn worth of construction work, or almost triple the level of the current record order book.
After doubling over the previous 12 months the share price has yet to fully recover from its mid August punishment. However as the stock slowly edges up toward its mid year highs we view this as an attractive buying opportunity given that the stock’s less than demanding forward PE is 15.5. Key risks facing the stock include a downturn in the Queensland property cycle, where it currently sources the majority of earnings, and labour shortages, which could inhibit the company’s ability to deliver on its work commitments.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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