- Bradken announces two acquisitions - Deals should boost earnings and product offering - Stock upgraded to Buy by Credit Suisse and Deutsche Bank

By Chris Shaw

In May Bradken ((BKN)) announced a capital raising, one that was seen by brokers as dilutive to earnings in the absence of any associated acquisitions. This dilutionary impact has, in the view of Deutsche Bank, now been offset by the purchase of Norcast Wear Solutions and Australian and Overseas Alloys for a total of $222 million.

Both the companies being acquired manufacture and sell mining wear parts, management at Bradken expecting the combined purchases will add $28 million including synergies to EBITDA (earnings before interest, tax, depreciation and amortisation) in FY12.

The purchases also allow Bradken to combine its existing Liner unit to the Norcast operations. BA Merrill Lynch expects this will create for Bradken a global leading offering with around 40% market share.

Guidance from management is for EBITDA in FY12 of $245-$255 million, which Deutsche notes would represent growth of 25-30% from expected EBITDA of around $196 million this year. As BA-ML notes, the market had not recognised the benefits of lower debt rates, meaning its own forecasts and market estimates for FY12 in particular had been too low.

On the back of the acquisitions brokers across the market have lifted earnings estimates for Bradken, Deutsche lifting its earnings per share (EPS) forecasts by 18% in FY12 and by 10% in FY13. Forecasts now stand at 60c this year, 71c in FY12 and 79c in FY13.

Credit Suisse has lifted its forecasts by an average of 8% to 59.5c, 69.6c and 83.2c respectively, while consensus EPS forecasts according to the FNArena database now stand at 61.4c for FY11 and 68.4c for FY12.

Price targets have similarly been increased, UBS lifting its target to $10.15 from $9.15 and BA-ML to $10.00 from $9.14. The consensus price target according to the database is $9.62, up from $9.24 previously.

Credit Suisse takes the view the additional earnings being generated via Bradken's acquisitions will alleviate market concerns with respect to earnings risk for FY12. These risks stem from the ESCO business and rail margins.

This, plus revised earnings expectations implying average earnings growth of 15% through FY14, is enough for Credit Suisse to upgrade Bradken to an Outperform rating from Neutral previously. Deutsche has made a similar upgrade in the expectation Bradken will benefit from macro tailwinds.

Deutsche estimates Bradken is trading on an earnings multiple of 10.4 times in FY13. Others in the market agree as post the upgrades by Deutsche Bank and Credit Suisse, Bradken scores a perfect six-for-six Buy ratings.

Shares in Bradken today are higher and as at 10.50am the stock was up 39c or 4.7% at $8.64. Over the past year Bradken has traded in a range of $7.08 to $9.60, the current share price implying upside of around 16% to the consensus price target in the FNArena database.