First NZ raises target price on Methven on earnings growth from Chinese acquisition

First NZ Capital raised its target price on Methven after the tapware maker agreed to buy its Chinese manufacturer Invention Sanitary.

First NZ, which has an 'outperform' recommendation on the stock, raised its 12-month target price to $1.50 from $1.35 on the expectation the purchase will boost earnings, the brokerage said in a note.

It lowered its expectations for the company's 2014 earnings before interest, tax, depreciation and amortisation by 2.9 percent to take account of higher New Zealand margins and lower earnings from Australia. However the brokerage raised expectations for 2015 earnings, as the benefits from the Chinese acquisition are expected to offset lower Australian earnings.

"Methven remains a good company being buffeted by some tough markets in Australia and the UK, while New Zealand appears to be slowly improving," First NZ said in the note. "The proposed acquisition of Invention Sanitary seems logical and will provide a nice earnings growth profile for FY15 and FY16."

First NZ's target price is a discount to its $1.73 discounted cash flow valuation because of near-term concerns about trading conditions and the length of time until benefits from the acquisition flow through, the brokerage said.

Shares in Methven last traded at $1.34, and have declined 2.2 percent so far this year.

BusinessDesk.co.nz

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