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Stonecap Securities revises ADF forecast, target price unchanged at $1.75

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Stonecap Securities has maintained its rating on ADF Group (TSE:DRX) with a one-year price target of $1.75 after the steel
fabrication company posted losses in its fiscal fourth-quarter earnings.

Thursday, ADF reported a big drop in earnings, citing slower market conditions and a hefty backcharge related to a U.S. project. ADF posted fourth-quarter loss per share of $0.01 against earnings per share of $0.03 last year, and below Stonecap’s consensus-matching EPS estimate of $0.01.

Revenue for ADF’s fourth quarter fell 27 percent to $10.9 million, nine percent below Stonecap’s estimate of $11.9 million.

Gross margin declined from 34 percent to 20 percent resulting in earnings of $0.4 million, down 87 percent year-over-year. Stonecap said the figures came in "well below" its estimate of $1.3 million.

ADF reported that the shortfall was driven by a higher proportion of revenues tied to lower-margin contracts recently awarded in Canada, a $3.5 million of backcharges that were identified in the fourth quarter for previously conducted work, and unspecified contractual change orders for the World Trade Center-related projects.

Stonecap reported that the revenues and associated profits related to these contractual change orders as well as the backcharges are expected to be negotiated and partially recouped over the coming quarters.

With manufacturing capacity utilization hovering around 50 percent, the WTC contracts approaching completion, and a competitive, but improving bidding environment in Canada, ADF said it plans to more aggressively pursue some lower margin project work that it had previously avoided.

Stonecap therefore, said it had adjusted its forecast to reflect fourth quarter results, a slightly lower sales contribution (-$2 million) reflecting current backlog levels and a slightly lower tax rate guidance.

"The net result is that our 2013 EPS remains unchanged, Stonecap said.

"Our one-year target price is also left unchanged at $1.75."

Stonecap said that while ADF remains profitable, earnings momentum will likely remain muted through 2013.

"As such, the shares will remain range bound at current prices until backlog levels and profitability levels improve."

"The company has 74 cents per share in cash and short-term investments on hand and modest debt which provides downside protection and an attractive entry point for patient long-term value investors."

Friday morning, ADF shares were flat at $1.40.

Quick facts: ADF Group

Price: 0.84 CAD

TSX:DRX
Market: TSX
Market Cap: $27.41 m
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