Risks At Imdex Remain To The Upside

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

– Imdex enjoying strong growth in Minerals division revenues
– Supports forecasts for solid earnings growth 
– Moelis rates Imdex a Buy, Deutsche Bank and BA-ML agree

By Chris Shaw

One of Imdex's ((IMD)) businesses is providing chemicals known as mud for drilling holes in the mining and energy sectors. Along with strong recent demand, Imdex has the added attraction of a low cost base for its operations in these sectors. 

As with the recent Campbell Brothers ((CPB)) full year result that showed strong revenue growth of about 55% in the Minerals division for the second half of FY11, Imdex has indicated revenue growth in its Minerals division was running at 54% for the third quarter of FY11.

For stockbroker Moelis, the recent market update indicates Imdex is at the least maintaining market share and pricing within what is a rapidly recovering global sector. For the full second half period Moelis expects Imdex will deliver revenue growth of 50%, a forecast the broker suggests may prove conservative given the strength of results in the third quarter.

This supports a Buy rating on Imdex, as the broker notes industry forecasts suggest a 70% increase in activity in the resources sector between 2010 and 2013. These forecasts, plus a significant backlog of capital raised by mining companies worldwide, should at least sustain spending in the coming year in Moelis's view.

Given a positive industry outlook Imdex should deliver solid earnings growth, Moelis forecasting earnings per share (EPS) of 16.3c this year and 19.9c in FY12. Consensus EPS forecasts according to the FNArena database stand at 14.5c and 20.5c respectively.

There remains upside risk to forecasts according to Moelis, as while management is targeting a 30% revenue contribution from the Oil and Gas division in coming years, the broker's expectations for this division remain considerably more conservative. This means if management can achieve its goals there is material scope for earnings to come in better than expected.

What could also drive earnings growth are acquisitions, as Moelis estimates Imdex had a gearing level of only 23% as at the end of the first half of FY11. This puts bolt-on acquisitions on the radar if management can find suitable targets.

While Imdex has enjoyed strong share price gains over the past year, having risen by 185% in that period, Moelis continues to see value. As the broker points out, its EPS forecasts imply earnings multiples of 12.7 times for FY11 and just 10.4 times for FY12.

Both Deutsche Bank and BA Merrill Lynch agree as both also rate Imdex as a Buy at current levels. Coverage of Imdex is limited given a market cap of around $430 million at current levels. 

Price targets among the three brokers are closely grouped, with Moelis and Deutsche setting targets of $2.50 and BA-ML a $2.43 target.

Over the past year Index has traded in a range of $0.67 to $2.27, the stock offering upside of 12.6% to the consensus price target in the FNArena database.
 

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