Interest In Imdex Continues To Grow

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This story features IMDEX LIMITED.
For more info SHARE ANALYSIS: IMD
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Earlier this week FNArena reported on Imdex ((IMD)) and noted how its profit result and strong earnings outlook had attracted Buy ratings from GSJB Were and Merrill Lynch (see Strong Earnings Growth Outlook Makes Imdex A Buy, 19/2/08). Following the result broker interest in the shares continues to grow, as Austock Securities has now also initiated coverage on the stock with a Hold rating as part of an expansion of its research of the mining services sector.

The broker’s neutral view reflects the balance it sees between the company’s growth outlook and the fact the stock is trading in line with its valuation, even allowing for the increased guidance that accompanied the latest profit result. Shaping its analysis is that while earnings risk appears to be to the upside the broker notes there are a number of risks going forward.

These include the recently acquired SEG assets, which are expected to contribute significant earnings growth in coming years. The risk in the broker’s view is any downturn in activity levels in the mining industry could impact on margins, so with the division expected to generate up to 12% of group earnings by 2010 some caution is appropriate.

Additionally, the broker points out the company already has around 50% share of the global market for down-hole instruments, which limits the potential upside in the sector where the company enjoys its largest technological advantage.

Also, with operations now spread around the globe the broker questions whether there is sufficient management depth to integrate the recent acquisitions and manage operations overall. This concern is also based on the fact some of the company’s previous expansion plans have not been overly successful.

On the plus side it notes there is scope for the company to gain additional market share in the oil and gas sector, where it currently generates less than 10% of its total sales, while under serviced markets such as Africa and Latin America also offer growth potential.

The broker’s numbers are in line with others in the market in the sense the company should achieve strong earnings growth, as its forecasts in earnings per share (EPS) terms call for outcomes of 13.8c this year, 16.7c in FY09 and 19.9c in FY10.

A further positive is assuming the sale of the non-core Sino Gas and Energy investment goes ahead the broker sees the company as being in a net cash position by FY09, which opens up options in terms of additional acquisitions. But with this priced in at current levels, the broker sees Hold as an appropriate rating.

Shares in Imdex today are slightly weaker and as at 2.40pm the stock was down 4c at $2.05, which compares to Austock’s target of $2.13 and an average according to the FNArena database of $2.84.

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