- A wetter than expected start to the half in Queensland has led us to revise some of our 2H sales assumptions for Wagners (WGN).
- Recent share price weakness creates opportunity to add to positions.
- WGN is partly insulated by the impact of wet weather on construction activity by its Boral (BLD) take-or-pay contract, which accounts for close to half of cement volumes.
- The strong 1H result WGN posted in February leaves the company on track to achieve prospectus guidance.
Soggy March takes edge off FY18
After Queensland's wettest March since 2012, we have increased the assumed impact on WGN sales volumes from more frequent interruptions to construction activities.
In addition to a typically quieter January period for construction activity, we have now assumed an additional 14 days of rain interrupted days in the March quarter.
Importantly for WGN, its take-or-pay contract with BLD (which accounts for close to half of cement sales) will not be affected, mitigating the overall impact of the unusually wet quarter.
Changes to estimates
The conservatively assumed lost volumes from the wet weather have only led to a small impact on our numbers for WGN, with FY18 EBITDA estimate falling 1.9% to A$51.6m (from A$52.6m).
While only a small impact, it could take some gleam off the FY18 result, which after a bumper 1H was on track to eclipse company prospectus forecasts.
While pulling back our numbers for 2H, we still see potential for WGN to win additional work on short-term projects during the half that could bolster the result.
We have also slightly trimmed corporate overheads in FY19 and FY20 after reviewing our assumptions.
Still on track for prospectus
Importantly our estimates still have WGN on track to come in comfortably ahead of its prospectus forecasts. Aided by its BLD take-or-pay contract and a strong 1H result.
We attribute some of the recent downward pressure on WGN's share price to potential concerns around its ability to meet guidance following the wet start to the year, however given our forecasts we view the share price weakness as an opportunity to add to positions opportunistically.
Market underestimating cycle
We maintain our Add recommendation on WGN with a slightly revised target price (Morgans client access only). We expect the market is placing considerable focus on WGN's short-term earnings picture given the strong share price run it has posted since listing.
This however ignores the size of the unfolding infrastructure-led construction cycle that should start to contribute materially to WGN earnings from FY20 (which will start to come under greater market focus as we head into FY19).
This highlights any short-term share price weakness as an opportunity to add to positions in WGN. The key risk to our Add call is Queensland construction activity.
Denis Wagner, Non-Executive Chairman at Wagners, presented at our Business Breakfast last month, discussing the history of the business and its plans for the future. Watch the presentation below:
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Disclaimer: Analyst owns shares. Morgans Corporate Limited was a Joint Lead Manager and Underwriter for the initial public offer of shares in Wagners Holding Company Limited and received
fees in this regard.
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