Brokers Jumping On Ausdrill

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– Two brokers initiate coverage on Ausdrill
– Stock now rated a Buy by all four brokers providing coverage
– Value on offer thanks to solid earnings growth outlook and expansion potential

By Chris Shaw

With mining services companies continuing to attract attention the latest in the spotlight is Ausdrill ((ASL)).  JP Morgan and RBS Australia have initiated coverage with Buy ratings, bringing to four the number of brokers in the FNArena database covering Ausdrill, all of which have Buy ratings.

Ausdrill has a leading position in production and exploration drilling services and products, operating in both the Australian iron ore and African gold sectors. Around 55% of group earnings are generated from Australian contract mining services and 34% from African mining services, the balance coming from manufacturing and supply/logistics operations. 

RBS estimates Ausdrill generates 70% of revenues from the gold and iron ore sectors. While this is a concentration of operations, RBS points out both sectors have a solid demand outlook over the next 3-5 years.

Ausdrill's services include drill and blast, grade control, load and haul and large equipment hire. JP Morgan notes demand for Ausdrill's services is increasing, this a response to increasing gold and iron ore production, higher strip ratios and declining yields.

RBS Australia points out 65% of revenues come from customers at the production stage, while a similar percentage of revenues for FY12 are leveraged to tier-one mining companies. RBS sees this as giving Ausdrill a further buffer against any potential commodity price volatility.

On RBS's forecasts, Ausdrill is expected to grow revenues by 13-16% across FY12-FY13. This will be driven by recent contract wins and the potential for margin gains from a capacity-constrained operating environment.

JP Morgan's estimates are even higher, the broker forecasting earnings per share (EPS) growth of 20% in FY12 and 12% in FY13. This reflects a recent equity raising, which will allow for additional investment in new plant and equipment. JP Morgan expects this will give Ausdrill a competitive advantage in bidding for new work.

What should also support earnings growth in JP Morgan's view is the potential for bolt-on acquisitions, as the recent capital raising has strengthened Ausdrill's balance sheet. Any acquisitions should boost capabilities, JP Morgan suggesting areas such as open cut and underground mining services and drilling products may be target areas for management.

On JP Morgan's forecasts, Ausdrill should generate EPS of 26.6c this year and 32c in FY12, while RBS Australia's forecasts stand at 27.2c and 32c respectively. Consensus estimates according to the FNArena database are 26.8c this year and 31.4c for FY12.

RBS Australia suggests there is some upside risk to earnings, this from the potential for margins to grow beyond what is currently forecast. Margin upside could come from the renegotiation of legacy contracts and increased productivity in the labour-intensive African contract mining operations.

Ausdrill offers value at current levels, RBS Australia's figures implying a FY12 earnings multiple for the stock of 9.9 times. JP Morgan similarly views the stock as cheap, noting at current levels Ausdrill is trading at a discount to valuation of around 17%. 

Potential catalysts to close this valuation discount include meaningful new contract awards and scope increases, as well as delivery of earnings expectations.

JP Morgan's price target for Ausdrill is $4.17, while RBS has initiated with a target of $4.00. This brings the consensus price target according to the FNArena database to $3.99. 

Shares in Ausdrill today are slightly higher and as at 12.20pm the stock was up 2c at $3.21. Over the past year Ausdrill has traded in a range of $1.555 to $3.94. The current share price implies upside of almost 24% to the consensus price target in FNArena's database.
 

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