The market took a negative view of yesterday’s interim result from Bradken Ltd, the rail and engineering group, sending the shares down more than 6% at one stage, despite a solid rise in earnings and a lift in dividend.
It’s a bit hard to work out just why the shares were sold down 58c at one stage to $8.72. The ended down 5.1%, or 48c, at $8.82 at the close.
Judging by the profit announcement and accompanying statement, the only nasty seemed to be a non-cash $10.7 million impairment charge in the Cement and Power division of the company.
Cash flow fell 56%, which could have been another reason for concern, but the company explained that in a way that seemed to signal few, if any underlying problems in cash generation at this stage. The changes basically reflect higher working capital and more business.
Before the impairment charge Bradken reported a net profit after tax and minorities, adjusted for impairment charges, for the half year ended 31 December 2010 of $38.2 million, a 49% increase over the previous corresponding period.
The company said that EBITDA improved by 27% to $90.1 million on a sales increase of 15%.
"Statutory NPAT including one-off, non-cash impairment and charges was $26.0 million, " the company reported. But confusingly the company said the net profit after tax of $38.2 million was "adjusted for impairment charges of $12.2m after tax."
So we have a lower net profit including the impairment charge impact, and we have a higher net profit which is adjusted for the impairment charges. A bit confusing.
“The Mining and Capital Products businesses performed exceptionally well with the non-rail businesses reporting an increase on HY10 in EBITDA of 56% on a sales increase of 34%,” Managing Director Brian Hodges said in the statement.
The Directors said the company will pay a fully franked interim dividend of 18.5c a share, up 42% from the previous corresponding half’s 13c a share.
The company’s dividend reinvestment plan remains active with a discount of 2.5% and the dividend will be payable on 21 March 2011 with a record date of 18 February 2011. The directors have determined that the Dividend Reinvestment Plan will be underwritten by Merrill Lynch.
That’s a sign the company needs as much capital as possible.
Revenue rose 14.9% to $535 million in the half, up from $462.9 million in the prior year.
Bradken says full year earnings are expected to grow by 15% to 20% over last financial year, with capital expenditure of $70 million.
"Following a slow January in the Australian operations due to climate induced issues, the balance of financial year 2011 is expected to see all mining businesses continue to expand," Mr Hodges said.
"Rail wagon builds in the second half would be similar to the first half, when 684 wagons were delivered."
With sales revenue from rail wagons down 26% in the first half, due to the change from coal to iron ore wagon production and lower margins as a result of competition from Chinese manufacturers, there’s a belief that the contribution from this business will be down over the full year.
Bradken also said it expects strong growth in the engineered products division, after sales increased by 63% in the first half.
"Mining, export locomotive and energy markets all improved significantly and the Almac acquisition boosted sales in the resources business," the company said.
Improving oil prices should see the US resources business, including the Almac acquisition, achieve a strong second half result, the company said.
The company’s Power & Cement Division is the big problem. Revenue was down by 24% and the company says demand in traditional markets "remained soft and short term significant improvements are not expected to occur".
"This resulted in an impairment charge of $10.7 million in the December 2010 financial statements, relating to the Power & Cement business."
Another problem seems to be the US where spare manufacturing capacity "is being used to produce mining consumables such as mill liners for export to South Africa and South America.
"Over time capacity will be used for existing consumable and capital products for the US and European markets."
For whatever reason, the market saw the result as coming in under forecasts on a before impairment basis.
