Imdex Continues Surprising To The Upside

This story features IMDEX LIMITED. For more info SHARE ANALYSIS: IMD

By Chris Shaw

Drilling services provider Index ((IMD)) updated the market on first quarter trading at its annual general meeting yesterday, the update showing solid trading performance in the period.

As Goldman Sachs notes, revenue for the first quarter of $46.9 million compared to $42.9 million in the final quarter of FY10 and $29.5 million in the same quarter last year. Margins also improved to 24.1% in EBITA (earnings before interest, tax and amortisation) terms, well up from 18.7% in the final quarter of 2010.

This means stronger earnings, with EBITA for the quarter coming in at $11.3 million, which is a solid improvement from the $8.0 million recorded in the final quarter of last year. To reflect this, Goldman Sachs has made significant increases to earnings estimates.

In earnings per share (EPS) terms Goldman Sachs has lifted its forecasts by 22.4% for FY11 and by 19.5% in both FY12 and FY13 to 10.8c, 12.4c and 14.8c respectively. Fellow-stockbrokers Morgan Stanley and Moelis have reacted similarly, the former lifting profit expectations by 29% in FY11 and by 31% in FY12 and the latter increasing its numbers by 35% this year and by 36% in both FY12 and FY13.

Driving the improvement in earnings, according to Moelis, are ongoing strong conditions in the global minerals exploration sector. This has allowed the group's drilling fluids operations to deliver strong growth.

Even stronger growth was recorded in the Down Hole Instrumentation operations, Moelis noting the division's equipment rental model has allowed for the generation of higher margins. The broker notes this boost to margins has facilitated expansion across the entire company.

Imdex also continues to develop new, more specialised tools for Down Hole Instrumentation needs, something Moelis sees as supportive of management's goal of growing revenue from the oil and gas sector. The target is for these revenues to be around 30% of group revenues within two to four years, which compares to 15% in the quarter just finished.

Looking forward, Goldman Sachs suggests strong commodity prices and strong exploration and drilling demand imply favourable conditions for Imdex, which supports the upgrades to earnings estimates.

Valuation remains an issue for Goldman Sachs however, as while the increases to its earnings estimates mean its valuation has risen 35% to $1.45 the broker still only rates Imdex as a Hold. This is because Goldman's new numbers imply a FY11 earnings multiple of 11.8 times, which is only a slight discount to the Small Industrials sector.

Moelis sees things somewhat differently, rating Imdex as a Buy as on its numbers the stock is on a FY11 multiple of 9.7 times on a pre-amortisation basis. Given cyclical earnings, Moelis doesn't expect a return to the 16 times earnings multiple on which Imdex was trading at its last peak, but the broker does see a narrowing of the current earnings multiple discount as the market becomes more comfortable with the company's earnings outlook.

This trend is already underway as Imdex shares are up 71% so far this year, Moelis seeing this as a reaction to the improvement in earnings the company has been delivering. Given its revised expectations, there remains further upside in the broker's view.

Morgan Stanley sides with Moelis, rating Imdex as Overweight within an In-Line view on the Australian Emerging Companies sector. Morgan Stanley's earnings revisions have seen an increase in price target to $1.60, which implies upside of around 26%. The new forecasts for Goldman Sachs mean an increase in price target of 25% to $1.50.

Given a market capitalisation of around $250 million Imdex receives little coverage in the broader market, the FNArena database showing none of the eight brokers included provide research on the company.

Shares in Imdex today are stronger despite a weaker overall market and as at 11.00am the stock as up 9.5c or 7.5% at $1.365. This compares to a range over the past year of $0.525 to $1.37.

Click to view our Glossary of Financial Terms