Royal Wolf Whistles Up A Buy Rating


-Royal Wolf attracts Buy rating -Strength in spread of exposure -Leveraged to construction recovery -Resource sector demand still grows

By Eva Brocklehurst

Royal Wolf ((RWH)), a provider of portable containers with a curious name, has received a Buy recommendation with the initiation of coverage by Deutsche Bank. This broker joins two others already on the FNArena database. Key to the company's attraction is the spread of its exposure to a number of industries. It has managed to grow earnings over the last two years despite the soft Australian economy.

As the company has a national footprint and earns nearly 20% of its revenue from the construction industry, Royal Wolf also stands to benefit from a recovery in the housing sector. This national footprint provides scalable operations and the company can service large customers without concentrating its risk, or without the capital constraints faced by regionally-focused competitors, according to Deutsche Bank. Macquarie and Credit Suisse cover Royal Wolf on the FNArena database. While Macquarie still likes the stock it has downgraded it recently to Hold, given the share price has neared the broker's target. Credit Suisse found the company's half-year results strong, with cash earnings up 32%, and has chosen to keep its Buy rating.

The company listed on ASX in May 2011 and its owner, General Finance Corp, retained a 50% shareholding. Here there is a risk in that the retention of a significant proportion of the stock could be seen as a share overhang, according to Deutsche Bank. The escrow period for GFN's stake expired in August 2012. The big stake also impacts on liquidity, the broker suspects. Another potential risk for the stock is adverse movements in interest rates - stifling a fragile construction and housing recovery. Also, there's foreign exchange risk. Here, a high Australian dollar is dampening manufacturing in the country but Deutsche Bank does not see manufacturing as a key, or indeed essential, driver of earnings for Royal Wolf.

Deutsche Bank notes that the strategy of increasing its proportion of leasing revenue should deliver increased margins and less volatility of earnings. The broker expects leasing should be more than 50% of earnings by FY14. Macquarie also liked the increased leasing component in the first half results and noted overall revenue was up 7%, driven by a 26% increase in leasing. The lease fleet is up 17% from the end of the first half, from investment and acquisitions, and Macquarie has queried the need to keep a 50% pay-out ratio with increased investment in the fleet. The company also has New Zealand operations which performed strongly. The Christchurch rebuilding is generating strong demand for containers.

Deutsche Bank's coverage was initiated with a $3.10 price target. Macquarie's is set at $2.80 and Credit Suisse at $3.05. Deutsche Bank notes the company is trading at a discount to its transport peers and other cyclical stocks which are leveraged to the building industry. Credit Suisse finds the stock has a lot to like about it with strong top line growth from both volume, pricing and previous bolt-on acquisitions.

The company has three areas of marketing its products - portable storage, portable buildings and freight. In portable storage, the strength is in a diverse customer base with no one customer/sector providing more than 20% of revenue. The resources industry is a key customer of portable buildings and here the company's competitors lie in the modular building segment, according to Deutsche Bank. The resources sector may be softer but it is still seeking Royal Wolf products, the broker maintains, particularly as the ramp-up in construction of large Australian LNG projects continues.

In this area the company is ingenious, according to Deutsche Bank, as it markets a container-based solution to customers who would not otherwise have considered such, effectively encouraging

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