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Bradken: First half 2012 results – The boom rolls on

Bradken Limited (ASX: BKN) today announced  a large increase in profit after tax, up 66% on first half 2011 results to $43.1m, and earnings per share jumped from 18.7 cents to 26.2 cents compared to the prior corresponding period.

What:  Sales for the six months to December 2011 were up 28% to $683.2m. Earnings per share were up 7.5 cents from 18.7 cents to 26.2 cents. Bradken stated that the market demand for mining capital equipment remains very strong, and production related mining consumables continues to grow strongly. The rail freight car market also remains strong and growing. Whilst the mining boom continues unabated, mining services companies such as Bradken will continue to prosper. The company is increasing its capital expenditure on expanding existing foundries and building new foundries.  The company is also expanding its range of products, which, so far, appears to be well received by customers.

About Bradken
Bradken is a supplier of consumable and capital products. The Company operates in five segments: mining products consists of design, supply and service of wear components for all types of fixed and mobile plant in the mining, mineral processing and quarry industries; industrial is a supplier of cast, machined and fabricated components for industries, such as smelters and refineries, steel manufacturers and sugar production; rail is a provider of freight rolling stock products and services, and renewed parts and the maintenance and refurbishment of rolling stock; engineered products based in the United States is a supplier of cast parts to the energy, mining, industrial and rail transport industries specializing in large highly engineered steel castings, and all other segment include cast metal services and power and cement.

So what: Net profit for 2012 is forecast to rise by 35-40% (excluding one-off costs), and FY2013 should see a continuation of growing demand for the company’s products and services. Expect to see similar reports from the likes of Mondelphous Limited (ASX: MND), Decmil Group Limited (ASX: DCG), RCR Tomlinson Limited (ASX: RCR), Mineral Resources Limited (ASX: MIN), Structural Systems Limited (ASX: STS) and Watpac Limited (ASX: WTP) when they report results in the near future.

While it’s good to see the company having a great outlook, and increasing sales and earnings, there are a few risks. Bradken has taken on additional debt and now has a total debt of $497m. This means Net Debt/Equity is now fairly high at 66%. Return on Equity (ROE), Return on Assets (ROA) and Return on Capital Employed (ROCE) ratios have all fallen every year since 2008. Net profit margins are slim, averaging around 6%.

Capital expenditure has increased, which is fine as long as there’s no hiccup in demand for Bradken’s products. It’s a cyclical business and at some stage, the cycle is going to turn down.

Now what:  If you believe the mining boom will continue unabated for years to come, then Bradken may be a stock for you. As for me, I’m steering clear. Bradken appears to becoming more capital intensive – all that new capital expenditure requires maintenance and upkeep and eventual replacement.  The company’s margins are fairly slim, significant increases in debt worry me, and there are better opportunities out there.

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Motley Fool contributor Mike King does not own shares in Bradken. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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