- Campbell Brothers (again) lifts interim earnings guidance
- Upgrade reflects continued strength in minerals testing volumes
- Brokers lift earnings forecasts
- UBS and Macquarie see value at current levels

By Chris Shaw

Having previously guided to 1H12 net profit of $90-$95 million, management at Campbell Brothers ((CPB)) has now lifted guidance to an expected result of $100 million. The upgrade reflects stronger than anticipated trading for the five months to the end of August.

While all divisions are understood to have been performing better, Macquarie suggests much of the upgrade in guidance reflects strength in minerals testing volumes. Commentary at the AGM of Campbell Brothers indicated global mineral sample volumes were tracking more than 30% higher in the first quarter of FY12 compared with the same period of FY11 and Macquarie's view is volumes have risen even higher through 2Q12.

As well, Macquarie takes the view environmental volumes were strong in 1Q12 and this is also likely to have continued through the half year. This positive trend should remain the case through to December, before a traditional season slowdown through the first quarter of next year.

The other boost to earnings comes from currency moves, as UBS notes a weaker Australian dollar relative to the US dollar is acting as a positive earnings tailwind. Each 1c move in the currency equates to a 1% move in earnings per share (EPS) on UBS's numbers.

To reflect the update to guidance, both Macquarie and UBS have lifted EPS forecasts for Campbell Brothers. The increase for Macquarie is just 1% in FY12, while UBS has been slightly more aggressive in lifting its forecasts by 3% this year and by 2% in FY13. Consensus EPS forecasts for Campbell Brothers according to the FNArena database now stand at 279.5c for FY12 and 322.6c for FY13; these numbers might rise further as other stockbrokers go through a similar exercise of updating their estimates post management's revised guidance.

Earnings risk remains to the upside in the view of UBS, as if current growth rates are maintained through 2H12 this would mean a further 3% increase in full year forecasts for FY12. Margin improvement could also offer a boost to earnings, as UBS estimates a 100-basis point change in EBIT (earnings Before Interest and Tax) margins for the minerals business implies a 2% change in EPS.

The major risk to earnings is a sustained downturn that results in lower activity in minerals testing, but UBS notes Campbell Brothers is offsetting this risk by increasingly diversifying operations. As an example, the Ammtec and Stewart Testing acquisitions in recent months have added metallurgical testing and inspection services to the product offering.

This suggests earnings will be more resilient going forward, while UBS is also positive on the geographical expansion Campbell Brothers has undertaken by moving into new markets such as Latin America. Services in the South African and Canadian markets have also been expanded.

Macquarie's forecasts currently assume Campbell Bothers will grow revenues in the ALS minerals testing business by 20% in FY13, this reflecting organic growth only. If revenues were to be impacted by the current downturn and fall by 20%, meaning a 40% decline from current expectations, Macquarie estimates a fall of around 16% in EBIT for the ALS operations. This is an improvement from the 25% EBIT declines experienced during the GFC.

Having factored in the changes to earnings estimates, Macquarie sees the current valuation for Campbell Brothers as being supported by the earnings outlook. The yield is also relatively attractive, as on Macquarie's estimates Campbell Brothers will yield 4.7% in FY12 and 5.3% in FY13, franked to 50%.

This is enough for Macquarie to retain an Outperform rating, through the price target has been trimmed to $50.12 from $50.58. UBS also rates Campbell Brothers as a Buy, with an unchanged target of $52.00. The FNArena database shows three Buy ratings and three Holds for Campbell Brothers, with a consensus price target of $49.28.

Shares in Campbell Brothers today are higher and as at 11.30am the stock was up 74c at $41.50. This compares to a trading range over the past year of $32.50 to $57.00. The current share price implies upside to the consensus price target according to the FNArena database of around 16%.