Campbell Brothers Limited (CPB)

By Jason Fittler

CPB has three business divisions:

1. Australian Laboratory Services which provides analytical testing services in key
areas of mining and mineral exploration, commodity analysis and certification,
environmental monitoring, equipment maintenance, food analysis and manufacturing
of electronic products.

2. Campbell Chemicals. This division covers industrial, commercial, consumer products and engineering services

3. Reward Distribution. This division supplies chemicals, paper goods, tableware, kitchenware and associated non-food consumables to hospitality and institutional markets.

CPB reported a solid full-year result, with normalised Net Profit After Tax (NPAT) down 29% to A$75.3m from a record year in Financial Year (FY) 2009 (A$106m).

Revenue fell 10% to A$825.5m. The revenue and profit decline was largely due to reduced global demand in mineral exploration markets that affected the ALS Minerals division.

We forecast 57% NPAT growth in FY 2011 driven by a recovery in exploration activity triggered by rising commodity prices, the recapitalised junior explorers and further penetration into the environmental and inspection services markets, facilitated by recent acquisitions and CPB’s acquisition of AEC.

We acknowledge that the RSPT will weigh on sentiment in the short term, but we believe CPB is well placed to weather this due to its international diversification, with more than 50% of its revenue derived offshore.

The premise of an economic and minerals exploration recovery appears to be supported by sector and company leading indicators.

Recently announced Mining House capex budgets suggest a return to 2008 (cUS$10bn) exploration budgets could be achieved over the next couple of years.

Indeed, CPB indicates that year to date  ALS mineral sampling is around 25% higher than in 2009.

The key upside to CPB is the operational (margin) leverage its ALS business achieves in periods of increased sampling activity. In 2008, ALS minerals sampling margins were estimated to be as high as 40%.

We do not forecast a return to these peaks, but we expect a 22% Earning Before Interest and Tax (EBIT) margin in FY 2011.

Our A$38.42 target price (from A$33.18) is at a 10% premium to our DCF. We maintain our Buy rating, with activity, currency and acquisitions the key risks to our target price.

For more information on Campbell Brothers Limited (CPB) please call us on 07 4771 4577.