Stock of the Day – Transfield Services (TSE) 


A good fiscal 2014 result from Transfield Services as operating revenue increased by 2% to AUD 3.7 billion and underlying net profit after tax or NPAT increased by 16% to AUD 72 million. The Australian and New Zealand or ANZ infrastructure operations which contributed 63% of fiscal 2014 revenue , achieved an outstanding revenue with underlying earnings before interest, tax, depreciation or EBITDA up by 25%.


TSE Earnings  (Source – Company Reports)

Businesses divested include the Transfield Worley New Zealand joint venture and operations in India and Middle East. During fiscal 2014, Transfield remained strictly focused on implementing its new operating model across ANZ region, with the aim of ensuring greater efficiency of contract delivery but lowering regional overhead cost base. We believe Transfield is overvalued at the current price as we believe the market is not adequately pricing in continuing issues with the company’s America’s operations.


TSE Contracted Revenue  (Source – Company Reports)
 
Transfield’s major ANZ operations contributed 87% of operating revenue in fiscal 2014 but experienced mixed results. The infrastructure business had an excellent year but earnings from resources and energy slumped. The ANZ infrastructure business increased revenue by 2% and EBITDA by 25%. Revenue growth was due to solid contract wins, renewals and work extensions in the defense, social, property and telecommunications sectors. 


TSE Daily Chart (Source – Thomson Reuters)

Fixed and variable costs continued to be removed from the ANZ infrastructure business reflecting strong, management controls. Transfield estimates fixed costs are now just 1.4% of revenue, down from 2% in fiscal 2013. The ANZ resources and energy business increased revenue by 6% but underlying EBITDA fell by 10%. Revenue was up on sold contract wins in the oil and gas sector offsetting declining mining sector work. Increased competition, mining customer pricing pressure and project delays contributed margin fall during fiscal 2014. We believe the stock is expensive and would review the stock at a later date.

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