Australia | Aug 02 2011
– Boart Longyear's earnings guidance seen as conservative
– Strong earnings should continue into 2012 as exploration activity ramps up
– Upside earnings risk and recent price weakness support Buy ratings
By Chris Shaw
Last week Macquarie announced its forecasts for interim earnings this month for drilling products and services provider Boart Longyear ((BLY)). Estimates were for revenues of US$894 million, EBITDA (earnings before interest, tax, depreciation and amortisation) of US$147 million and net profit of US$64 million.
Second half earnings are expected to be even better in Macquarie's view, reflecting seasonal factors and benefits from further improvements in pricing and a ramp-up in demand gaining pace over the course of the full year.
Assuming Macquarie proves correct in expecting an earnings split of 43%:57% for 1H:2H respectively, this implies guidance from management for full year revenue of US$1.75 billion and US$300 million in EBITDA is likely to prove conservative.
What supports Macquarie's view is the fact risk factors remain favourable, as pricing power is returning, both major and junior resource companies are spending money and utilisation rates are increasing.
To reflect this, Macquarie's forecasts for full year revenue and EBITDA and revenue stand at US$1.92 billion and US$344 million respectively. These estimates are 15% and 10 above management's guidance.
Citi also sees scope for strong earnings for Boart Longyear, pointing out miners are currently ramping up greenfield exploration activity. As examples, year-to-date spending on gold and copper exploration are up 13% and 21% respectively when compared to 2010 levels.
Record volumes are expected in 2012 given a tight correlation between exploration spending and prior year commodity prices. As well, Citi estimates junior miners have around $3 billion in surplus exploration cash, an amount that would underpin a material increase in total exploration spending.
The increase in exploration activity should boost volume growth, while Citi also notes greenfield drilling commands a 10-15% price premium. This is a positive for margins for Boart Longyear.
Given the expectation of a return to peak pricing by the middle of 2012, Citi suggests consensus earnings forecasts for Boart Longyear for FY12 and FY13 are currently too low. Citi is forecasting earnings per share (EPS) of US31.8c this year, rising to US43.8c in 2012 and US53c in 2013.
Macquarie in contrast is forecasting EPS of US35.1c this year, US42.6c in 2012 and US47.7c in 2013, while RBS Australia is forecasting EPS of just US31c this year, US40c in 2012 and US45c in 2013. JP Morgan is even more conservative, forecasting EPS this year of US29.5c and in 2012 of US37.8c.
For both Macquarie and Citi the scope for better than expected earnings supports a Buy rating for Boart Longyear, a recommendation reinforced by recent relative share price underperformance. As Macquarie notes, Boart Longyear has lost around 6% since mid-June, while Major Drilling has gained 12% and Layne Christiansen has risen by 9%.
This underperformance has left Boart Longyear trading at a 5-13% discount to global peers and a 7-37% discount to domestic peers on Macquarie's estimates. The underperformance in recent weeks has also improved the value on offer, as Citi calculates Boart Longyear is currently trading on a FY12 earnings multiple of 10.4 times.
Overall, the FNArena database shows Boart Longyear is rated as Buy five times and Hold three times. One of the Hold ratings is courtesy of Deutsche Bank, which suggests while the outlook for the company is positive this is being priced into the stock too quickly. As evidence of this, Deutsche is well below others in the database in forecasting 2011 EPS of just US27c.
JP Morgan sides with Deutsche Bank and also rates Boart Longyear as Neutral, arguing much of the operational upside potential has already been achieved by management. As well, JP Morgan sees better value elsewhere in the sector, preferring the likes of Ausdrill ((ASL)) and Transfield Services ((TSE)) among more directly comparable peers.
The FNArena database shows a consensus price target for Boart Longyear of $4.88, which implies upside of around 17% from current levels. Targets range from $4.40 to $5.27.
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