Finning Would Benefit from Offloading U.K. Asset - UBS

Vancouver, B.C.-based Finning International Inc. (FINGF.PK), the world's largest dealer of Caterpillar (CAT) equipment, appears to be on an upswing, but only if it sells or downsizes its investment in its U.K. business.

Fadi Chamoun, analyst with UBS, has increased earnings estimates for Finning by 16% in 2010 and 10% in 2011 to $1.32 and $1.54 a share respectively.

"The bulk of this increase is a result of neutralizing the negative impact of Hewden's performance on Finning's earnings starting in the second half of 2010," he said in a note Tuesday.

UBS is also expecting a modest increase in customer support revenues and the inclusion of a share repurchase program in 2010.

Mr. Chamoun estimates that Hewden accounted for about a third of the company's revenues in the United Kingdom in the past year, with about C$325-million to C$350-million on an EBIT loss of about C$20-million to C$30-million.

He said:

We believe Hewden, if not sold, will be considerably downsized in the coming year. In our view, the sale or downsizing of the Hewden assets would be accretive to Finning's overall return on invested capital and return on equity and therefore likely to have a positive impact on valuation.

UBS has upgraded Finning to a Buy rating from Neutral, while raising its price target to C$20 from C$18.