TRADING UPDATE
Empresaria released a trading update on November 21st, lowering the expected growth rate for FY2017 PBT. This was due to the weak market conditions in the Mideast which were flagged in the H1 results, and also to changes in legislation in Germany. The German issue, also previously know, relates to rules restricting the length of tenure for contract workers (Empresaria’s main focus) and the introduction of equal pay after 9 months. These rules take full effect in 2018, but employers appear to be adjusting their behaviour ahead of implementation.
CHANGES TO OUR FORECASTS
The table below shows our new earnings forecasts, which fully reflect the new guidance. We are now forecasting EPS growth of 5.3% in FY2017 (previous forecast 19.8%), and 2.2% in FY2018 (prev. 9.2%).
INVESTMENT CONCLUSIONS
Whilst our 2017 EPS forecast is now 12% lower than previously, the share price has now declined 39% from its June 2017 highs. We attribute this to:
- A lower earnings growth trajectory in 2017e, 2018e.
- Investor confidence dented, as Empresaria has downgraded forecasts for the first time in several years.
However, with the shares now trading on only 8.5x P/E for 2017e, we argue that it is worth noting:
- The company has delivered EPS growth of 17.9% per year over the 4 years to 2017e, with growth still expected to be positive in 2017e and 2018e (albeit at a slower rate).
- Cash conversion is consistently strong, and the balance sheet position is very comfortable (interest cover 16.7x, 2017e).
- The multi-niche strategy and diverse geographic base are compelling differentiators, and should provide a platform for renewed growth beyond 2018.
Looking at the 5 year share price chart, there have been two big dips – H2 2014, and H1 2016. These proved to be good buying opportunities, and we argue that the current share price weakness should encourage investors to take a closer look at Empresaria.