CXG 2.27% 21.5¢ coote industrial ltd

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    Coote Industrial Ltd (CXG) $0.52
    Recommendation: Speculative Buy Analyst: John Deniz
    Assuming Greentrains doesn’t deliver, then what?
    Investment Highlights
    Under this scenario (1), importantly, CXG can stay afloat. Effectively this scenario is already being discounted by the market. Assumptions under this scenario include: 1) $82.7m of loco’s sold into Greentrains in the back end of FY08 brought back on CXG’s balance sheet; 2) future loco refurb and sales works come right off for FY09F and FY10F; 3) a moderate slowdown and falling margins across CXG’s other divisions for FY09F and FY10F. Under this scenario (1), CXG would still be solvent. Implied ICR’s would be 2.0 and 2.1x, for FY09F and FY10F, respectively. Whilst coverage ratios sound skinny, they would be satisfactory in the short term and not lead CXG’s bankers to force its hand. Liquidity is satisfied, with CXG confirming its banks will support the business under this worst case and to roll-over ~$25m of short term (3 month) debt when due.
    Massive mismatch b/n market discount and guidance. CXG’s quoted guidance is for FY09F revenue of $358m, NPAT growth of 14% to $25m (or normalised NPAT of $26.5m). Obviously this is based on Greentrains securing funding and delivering in FY09F - CXG reaffirm this is progressing, citing tight credit markets for the delay. In response to an ASX price query (28/10/2008), CXG stated FY09F not expected to be <15% off FY08A – still well in excess of markets implied discount.
    Given state of the credit markets, Greentrains deal could go either way. Our worst cast scenario 1 implies an NTA at $0.42/sh for FY09F - inline with the market discount and arguably a reasonable basis for a floor price for the stock, even in this market. The obvious near term catalyst is CXG banking the $82.7m Greentrains receivable, which would see the stock materially rerated. Ongoing CXG refurbished loco sales into Greentrains and/or other third-party Rail Lessor’s and Rail Operators should drive a further rerating. This would provide some substance to CXG’s Rail and Rollingstock business model and a more probable recurring-like revenue stream.
    Downgrades to our FY09F & FY10F EPS and 12m TP. Our revised forecasts reflect our base case - scenario 3 (overleaf) - whereby Greentrains locos are brought back on balance sheet, a marked drop in sales from Rollingstock division, Rail and Rollingstock margins falling to 12% FY09F and FY10F (previously ~15.2%); and a moderate slowdown across CXG’s other divisions in FY09F and FY10F. Our EPS forecasts are down 43% and 44%, for FY09F & FY10F, respectively. Our 12m TP down is $0.75/sh (50/50 blend of 4.5x 12m fwd PE and DCF Valuation of $0.88/sh). Given the increased risk around the pending Greentrains receivable and in turn CXG’s ‘Rollingstock & Rail’ business model, we are downgrading our recommendation to SPECULATIVE BUY.
    Patersons Securities
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