Broker snap: Stobart one for the long haul

20th Oct 2010 12:53

Killik remains confident in Stobart Group's long-term growth despite the broker's near-term earnings forecasts being downgraded 8%.The interim results from the transportation, logistics and warehousing company for the half year revealed an 11.7% rise in revenue to £243.7m and pre-tax profit from continuing activities increasing 24.2% to £15.4m. However, the broker has highlighted challenges in the road haulage business due to shorter customer lead times and cautionary expectations due to VAT hikes and the impact of the government spending cuts.Eddie Stobart, the group's largest division, is performing well and has signed a number of significant new contracts (e.g. Tesco, AG Barr and Britvic) which will contribute further growth in the second half of the year.However, the group's truck utilisation rate has dropped as it "is experiencing some challenges in running the fleet. Customer lead times have shortened and their forecasting has become less accurate, while their targets remain demanding", the broker said. The group has been forced to slightly reduce its full-year profit guidance towards to the bottom end of current expectations. Stobart's near-term future will be affected following the transport budget cut, with its subsidiary Stobart Rail already performing below expectations as "reduced Network Rail expenditure adversely affected volumes", the broker said.Stobart Air traded in line with consensus and Stobart Ports has exceeded expectations in the period.The broker notes that the financial position of Stobart remains robust despite an increase in net debt from £96.8m to £162.0m which was expected. The group has maintained the dividend and "if the payout is held at the full-year stage, the shares will yield 4.2%".Although Killik has downgraded its earnings forecasts by 8% following Stobart's "disappointing" near-term outlook, it remains positive on the long-term potential for margin expansion "as the group benefits from economies of scale, higher utilisation rates, operational gearing and growth in high-margin non-road activities."The broker reiterates its long-term 'buy' recommendation with a target price of 143p.