Broadspectrum has announced its 1H16 results. While revenue is slightly down on the prior period, earnings are improved and the company has lowered its financial leverage ratio
Broadspectrum (formerly Transfield Services) has reported its 1H16 results, summarised in the figure below:
Revenue decreased slightly by 1.8% due to challenging conditions in the oil and gas and the utilities sub-sectors, together with delays in telecommunications work volumes. Despite the small decline in revenue, underlying EBITDA increased by 11.1% to $124.7m from $112.2m. This was a function of:
- A four month extension to the immigration contract on existing terms but with an expanded scope
- The positive turnaround in the Americas business
- Expanded scope in the Defence contract
- Benefits from contract margin and procurement cost savings initiatives
Underlying NPAT increased by 54.2% to $27.9m, reflecting the company’s improved operating performance and balance sheet management. While the company did not declare a dividend despite the solid result, the company did announce a share buy-back of up to 10% of the ordinary shares of the company over the next 12 months which in effect is a return of cash to shareholders.
In recent years, Broadspectrum has focused on strengthening the balance sheet, re-shaping and improving the business, and positioning its contract portfolio within sectors that are weighted towards non discretionary spend on essential services. The company has continued to reduce net debt to $460m at the half resulting in a reduction in the leverage ratio to 1.7x, down from 2.2x at 31 December 2014 now within the target range of 1.5x to 2.0x. The Company expects to end FY2016 with net debt of between $370m to $390m and a leverage ratio (Net Debt / Underlying EBITDA) of circa 1.3x1. This will represent a $251m to $271m reduction from 31 December 2012. Ongoing free cash flow provides significant scope for further debt reduction.
Broadspectrum is rated BB/Ba2 with a stable rating outlook, and we believe the guided FY16 net debt / EBITDA ratio of 1.3x is conservative given the rating. The Broadspectrum US dollar bond unsecured 2020 bond is rated B+/Ba1 which is 1-2 notches below the corporate rating given it ranks below senior secured debt and has a low expectation of recovery in the event of a default. The key risk for the business is around the renewal of the immigration contract next year, which has been a significant contributor to earnings.
With an indicative yield to maturity of 7.1%, the Broadspectrum US dollar bond is offering good value for what is a relatively solid performing credit in the ‘sub investment grade’ space.
We note that the company is subject to a lower, subsequent takeover offer from Ferrovial which is rated higher than Broadspectrum at BBB. While a takeover by Ferrovial would likely be credit positive for Broadspectrum given the higher rating, at this stage the company is recommending shareholders reject the takeover offer on the basis that it undervalues the business. In addition, we note the company’s announcement of a share buyback of up to 10% of the ordinary shares over the next 12 months as a strategy to fend off Ferrovial’s offer.
A link to the company’s announcement is available here.
Please contact your FIIG representative for further information on the Broadspectrum USD bond. Quoted pricing is indicative and subject to change. Available to wholesale investors only.