Why the Broadspectrum share price soared today

Shares in Broadspectrum Ltd (ASX: BRS) ex-Transfield soared more than 7% today, after the consulting, engineering and maintenance group nearly tripled reported net profit to $25 million for the six months to December 2015.

In early trading the Broadspectrum share price jumped as high as $1.20, before coming off the boil and currently trade at around $1.13 (up 6.3%) as we head towards lunchtime.

Here are the highlights…

  • Revenues: $1,861.5 million – flat compared to the first half of the 2015 financial year (1H FY15)
  • Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $124.7 million, up 11% over 1H FY15.
  • Underlying net profit: $27.9 million, up 54% over 1H FY15
  • Dividend: None declared
  • Net assets per share: $1.63
  • Net debt down to $460 million, expected to fall to between $370 and $390 million by the end of June 2016.
  • Share buyback of up to 10% of the company’s issued shares over the next 12 months announced.

Strong result

It’s definitely a positive result for Broadspectrum given the carnage in the resources and energy sectors thanks to falling commodities prices. As a result, revenues from resources and industrial make up just 18% of overall revenues (28% in FY13), with Defence, Social and Property sectors generating the lion’s share of revenues. Infrastructure is also an important sector with 24% of total revenues (37% in FY13) .

Logistics and facilities management make up 41% of revenues by service line, followed by operations and maintenance. With 24%.

Blue skies ahead

In further good news, Broadspectrum says is now has $10.3 billion worth of contracted revenue compared to $8.8 billion at the same time last year, the Americas division is growing strongly and is forecasting underlying EBITDA of between $280 million and $300 million for the full 2016 financial year (FY16). That’s represents a strong growth outlook for the second half of the year, considering Broadspectrum reported $124.7 million in EBITDA for the first half.

Risks haven’t changed

However, the risks of investing in a cyclical business heavily exposed to the downturn in the resources and energy space haven’t disappeared, and mining investment has yet to hit bottom.

Broadspectrum’s margins remain ultra thin – generating just $27.9 million in profit from $1.8 billion in revenues is just 1.5% – and leaves little leeway should things go wrong – as they have in the past.

Foolish takeaway

Foolish investors might want to ignore the hype – yes, Broadspectrum is improving its financial results and the outlook appears better – but far too many things outside management’s control can influence the results, particularly with such slim margins.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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