Weaker trading, late delivery affects Pumpkin Patch

Pumpkin Patch
Pumpkin Patch announced a weaker-than-expected result for the first half, driven by subdued trading conditions in Australia and New Zealand and a one-off impact from the late delivery of summer inventory.

Forsyth Barr broker Suzanne Kinnaird said divisional profit margins were higher due to improved gross margins, higher foreign exchange rates and lower store overheads.

''We expect further margin improvement and the company is well placed for a pick-up in consumer demand. We like the strategic direction being taken by Pumpkin Patch, although the expected positive earnings impact of these changes will only be seen from 2014.''

Forsyth Barr maintained a positive long-term view with an accumulate recommendation on the company's shares, she said.

Hellaby Holdings
The debt-funded acquisition of Contract Resources would provide Hellaby Holdings with both sector and geographical diversification and a positive growth profile, Ms Kinnaird said.

Contract Resources was established in late 1989 and had developed niche markets over the past 24 years, providing a range of specialised industrial and mechanical services to the oil, gas and petrochemical sectors in Australia and New Zealand. It also operated in the United States and was expanding its presence in the Middle East.

Contract Resources was forecast to generate revenue of about $150 million and operating earnings of more than $20 million for the 12 months to March 2014.

After including Contract Resources into its forecasting framework, Forsyth Barr had lifted its earnings per share (eps) forecast by 22.4% to 36.6c.

The restructured Hellaby businesses were now dependent upon a recovery in economic activity, for which the outlook remained mixed. The recommendation on the shares was accumulate.

Vector
Morningstar Equity had increased its fair value on New Zealand energy company Vector to $2.60 a share, senior analyst Adrian Atkins said.

The New Zealand Commerce Commission had finalised its gas distribution and transmission pricing for Vector recently, in line with the draft gas price path decisions released in October 2012. The commission had taken into consideration future capital expenditure, costs and allowable returns for the next five-year period when calculating future prices.

The pricing methodologies were being challenged by Vector, as it believed the regulatory regime did not provide incentives investments in critical infrastructure like gas transmission and distribution, he said.

A verdict on the matter was expected in the next three to six months.

Morningstar forecasts remained unchanged. The gas transmission and distribution business would experience a one-off impact in 2014, assuming the court ruled in favour of the commission. Operating profit was forecast to decline from $625 million in 2013 to $605 million in 2014 and reported profit to fall from $200 million to $182 million in the same period.

David Jones
Morningstar had maintained its fair value estimate of $A1.70 for retail chain David Jones, Mr Atkins said. Shares last traded at $A3.08.

''We continue to view the Australian department store market as becoming increasingly marginalised as established international designs utilise the internet to increasingly market direct to domestic consumers.''

The target demographic of David Jones was mainly upper-end income earnings, lessening the impact of reversals in the wealth effect. Emphasis was on exclusive supply arrangements, private labels and broadening the customer base to the 25 to 35 age group, he said.

The mature business was under pressure from online competition while a revitalised Myer might also be a factor.

The majority of cost-cutting opportunities had been realised and revenue growth was now necessary to drive earnings growth. A David Jones-branded Amex card contributed significantly to earnings growth, but expiry of the current contract with American Express in 2014 would result in a sharp earnings fall, Mr Atkins said. Positives included the strength of the David Jones brand and a strong balance sheet. The company distributed around 85% of profit to shareholders as dividends.