Shareholders might have noticed that Guangshen Railway Company Limited (HKG:525) filed its yearly result this time last week. The early response was not positive, with shares down 2.4% to HK$1.61 in the past week. Statutory earnings per share of CN¥0.11 unfortunately missed expectations by 19%, although it was encouraging to see revenues of CN¥21b exceed expectations by 2.8%. Following the result, the analysts have updated their earnings model, and it would be good to know whether they think there's been a strong change in the company's prospects, or if it's business as usual. Readers will be glad to know we've aggregated the latest statutory forecasts to see whether the analysts have changed their mind on Guangshen Railway after the latest results.
Following last week's earnings report, Guangshen Railway's eleven analysts are forecasting 2020 revenues to be CN¥21.1b, approximately in line with the last 12 months. Statutory per-share earnings are expected to be CN¥0.11, roughly flat on the last 12 months. In the lead-up to this report, the analysts had been modelling revenues of CN¥21.6b and earnings per share (EPS) of CN¥0.13 in 2020. The analysts seem less optimistic after the recent results, reducing their sales forecasts and making a substantial drop in earnings per share numbers.
The consensus price target fell 7.9% to CN¥2.47, with the weaker earnings outlook clearly leading valuation estimates. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. There are some variant perceptions on Guangshen Railway, with the most bullish analyst valuing it at CN¥4.18 and the most bearish at CN¥1.63 per share. So we wouldn't be assigning too much credibility to analyst price targets in this case, because there are clearly some widely different views on what kind of performance this business can generate. As a result it might not be a great idea to make decisions based on the consensus price target, which is after all just an average of this wide range of estimates.
Taking a look at the bigger picture now, one of the ways we can understand these forecasts is to see how they compare to both past performance and industry growth estimates. We would highlight that sales are expected to reverse, with the forecast 0.3% revenue decline a notable change from historical growth of 7.5% over the last five years. Compare this with our data, which suggests that other companies in the same industry are, in aggregate, expected to see their revenue grow 3.0% next year. It's pretty clear that Guangshen Railway's revenues are expected to perform substantially worse than the wider industry.
The Bottom Line
The most important thing to take away is that the analysts downgraded their earnings per share estimates, showing that there has been a clear decline in sentiment following these results. Unfortunately, they also downgraded their revenue estimates, and our data indicates revenues are expected to perform worse than the wider industry. Even so, earnings per share are more important to the intrinsic value of the business. Furthermore, the analysts also cut their price targets, suggesting that the latest news has led to greater pessimism about the intrinsic value of the business.
With that in mind, we wouldn't be too quick to come to a conclusion on Guangshen Railway. Long-term earnings power is much more important than next year's profits. We have forecasts for Guangshen Railway going out to 2022, and you can see them free on our platform here.
However, before you get too enthused, we've discovered 2 warning signs for Guangshen Railway that you should be aware of.
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