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Gammon reported EBITDA losses for 4QFY11 due to sharp cost overruns on fixed-price
contracts for subsidiary GIPL. With these contracts still forming a large part of coming quarter
sales and no turnaround in sight for European subsidiaries, we maintain Sell on cuts to our EPS
and target price.
4QFY11 standalone results: EBITDA swings into losses
Despite revenue growth of 5% yoy and 27% qoq, parent EBITDA for 4QFY11 came to a loss of
Rs530m, due mainly to higher raw material expenses on legacy fixed-price contracts with
Gammon Infra (GIPL). EBITDA margin for the quarter slipped into negative territory, as against
+8.1% in 3QFY11. Consequently, normalised net loss was Rs1.0bn (RBS estimate: Rs239m
profit), as against profits of Rs381m in 4QFY10 and Rs247m in 3QFY11. Normalised EPS for the
quarter came in at negative Rs7.3/share. For FY11, normalised PAT declined 93% to Rs108m
despite a 25% yoy increase in revenue.
We expect slower growth and lower margins; we cut EPS by 19% for FY12F
We believe that the pain of fixed-price contracts (10% of order book) may continue to impact the
parent for next two quarters. Also, given the ongoing issues in the construction sector
(environmental concerns, decision-making delays at government departments), we think it best to
remain conservative. We lower our FY12-13 revenue forecasts by 2% each and our FY12 margin
forecasts by 40bps to 8.3% (guidance 9%). As a result, our FY12-13 EPS forecasts declined 19%
and 13% respectively.
We maintain Sell as any turnaround looks a few quarters away
We lower our target price to Rs85.90 (Rs106.70), reflecting our earnings revisions for the core
business. We continue to apply a 15% holding company discount to the valuation of all
subsidiaries. We value Indian subsidiary GIPL at market price and the Italian subsidiaries at a
20% discount to the EV/sales multiple of peer Alstom. We believe the legacy fixed-price
contracts, higher interest rates and slower sales growth may continue to damage profitability in
quarters to come. We await some respite in 2HFY12, when the fixed-price contracts should be
less of an issue and the European subsidiaries should revive. With 19% potential downside to our
target price, we maintain Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gammon reported EBITDA losses for 4QFY11 due to sharp cost overruns on fixed-price
contracts for subsidiary GIPL. With these contracts still forming a large part of coming quarter
sales and no turnaround in sight for European subsidiaries, we maintain Sell on cuts to our EPS
and target price.
4QFY11 standalone results: EBITDA swings into losses
Despite revenue growth of 5% yoy and 27% qoq, parent EBITDA for 4QFY11 came to a loss of
Rs530m, due mainly to higher raw material expenses on legacy fixed-price contracts with
Gammon Infra (GIPL). EBITDA margin for the quarter slipped into negative territory, as against
+8.1% in 3QFY11. Consequently, normalised net loss was Rs1.0bn (RBS estimate: Rs239m
profit), as against profits of Rs381m in 4QFY10 and Rs247m in 3QFY11. Normalised EPS for the
quarter came in at negative Rs7.3/share. For FY11, normalised PAT declined 93% to Rs108m
despite a 25% yoy increase in revenue.
We expect slower growth and lower margins; we cut EPS by 19% for FY12F
We believe that the pain of fixed-price contracts (10% of order book) may continue to impact the
parent for next two quarters. Also, given the ongoing issues in the construction sector
(environmental concerns, decision-making delays at government departments), we think it best to
remain conservative. We lower our FY12-13 revenue forecasts by 2% each and our FY12 margin
forecasts by 40bps to 8.3% (guidance 9%). As a result, our FY12-13 EPS forecasts declined 19%
and 13% respectively.
We maintain Sell as any turnaround looks a few quarters away
We lower our target price to Rs85.90 (Rs106.70), reflecting our earnings revisions for the core
business. We continue to apply a 15% holding company discount to the valuation of all
subsidiaries. We value Indian subsidiary GIPL at market price and the Italian subsidiaries at a
20% discount to the EV/sales multiple of peer Alstom. We believe the legacy fixed-price
contracts, higher interest rates and slower sales growth may continue to damage profitability in
quarters to come. We await some respite in 2HFY12, when the fixed-price contracts should be
less of an issue and the European subsidiaries should revive. With 19% potential downside to our
target price, we maintain Sell.
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