PCH shares hit hard despite four years of record profits

Scaffolding and form-work supplier PCH Group expects to report its fourth consecutive record profit this year as it benefits from the global resources boom. But that hasn’t stopped investors from hammering its share price.

PCH is working on international oil and gas projects far bigger than anything under way in Australia, belying its modest headquarters in Malaga.

It has 900 contractors working on BP’s $20 billion ACG and Shah Deniz projects on the shores of the Caspian Sea in Azerbaijan, and has secured its initial contract on the $40 billion Kashagan project due to get under way on the other side of the Caspian in Kazakhstan.

It has also just won its first contract in Qatar, where up to $100 billion could be spent over the next five years.

Collectively, PCH’s inter-national operations generate just over half its revenue, which jumped 70 per cent in the December half-year to $60.1 million. That underpinned a better-than-expected net profit of $11.3 million, which was more than double the previous half-year result.

The company warned that its second-half result would not be as strong but still expected earnings per share to jump by about 45 per cent.

Brokers such as Patersons Securities and Linwar Securities responded by lifting their valuation of the stock to about $1.10 per share, and investors very quickly pushed the share price up towards that level.

But the spike didn’t last long, with the stock falling to about 65 cents this week.

The sell-off has been partly attributed to pre June 30 selling by institutional investors.

Managing director Jamie Cullen also acknowledged that the business has suffered a number of short-term setbacks.

“We’ve got projects being cancelled, or delayed, and some work getting shifted overseas,” he told WA Business News.

The bad news has been in both Australia, with big expansion projects at Worsley Alumina and Alcoa’s Wagerup refinery expected to be delayed, and in the Caspian Sea region.

“Kashagan looks like it will be delayed for a year,” Mr Cullen said. “For us, that’s disappointing, coupled with Worsley being pushed back and Wagerup, there has been a bit of negative news flow.”

The Kashagan delay was forcing the company to rejig its work plans.

“Whereas I had expected the Caspian operation to be running at high utilisation levels by 2006-07, it’s probably going to come down to about 40 per cent,” Mr Cullen said.

“However, I expect we will move the excess equipment down to the gulf because I am very confident we will pick up substantial work there.”

Mr Cullen said PCH was also being affected by competitors who were heavily discounting their prices.

While big companies such as BP, BHP Billiton and Woodside have global standards, he said smaller companies were not so demanding.

“Overseas we are seeing clients prepared to pay for quality, and also demand quality, whereas Australia is a bit of a mixed bag,” Mr Cullen said.

“There has been a flood of sub-standard equipment coming into Australia, manufactured in India, China and the Middle East.

“Even though the market here is booming, it has got extremely competitive.”

Mr Cullen emphasised PCH’s longer-term prospects were still very strong.

“The only concern I have is very short term, which is what the market focuses on, but we are completely relaxed in the longer term,” he said.

PCH’s willingness to take a longer-term view led to its current strong profile in the Caspian Sea region, where it first established an office in 1999.

“We went there early and we did the hard yards,” Mr Cullen said. “It was a shoestring operation; we rented a little office and the manager there used to sleep in the office.

“We knew there was a lot of work coming up but it took three years for the work to start.”

The company’s two main regions are now WA and the Caspian.

“We are now the largest contractor of our kind in the Caspian region,” Mr Cullen said.

Looking ahead, he is aiming to expand the company’s operations in three regions: the Gulf, including Qatar; Asia, including Thailand and Singapore; and the east coast of Australia.

Adding to its resource sector project work, PCH also generates revenue from commercial construction and two-storey house building.

“If we get all that, I think we will have a reasonably diversified business,” Mr Cullen said.