Downgrades As Boart Longyear Again Cuts Guidance

This story features BOART LONGYEAR GROUP LIMITED. For more info SHARE ANALYSIS: BLY

 – Boart Longyear cuts earnings guidance again
 – Management credibility and earnings outlook in question
 – Brokers cut forecasts and price targets
 – Downgrades in ratings follow changes to models

By Chris Shaw

An inability to lower costs to meet weaker end-market demand and weaker margins forced Boart Longyear ((BLY)) to reduce 2012 earnings guidance yesterday. While management reiterated full year revenues would be around US$2.0 billion, EBITDA (earnings before interest, tax, depreciation and amortisation) guidance is now for a result of US$310-$320 million, down from a previous range of US$360-$390 million.

As Macquarie notes, this is the second downgrade to earnings guidance from Boart Longyear in the past three months, which brings into question the credibility of management. This implies some questions with respect to guidance for 2013, where management have indicated EBITDA should be above the 2H12 run rate of around US$107 million.

Macquarie's view is the magnitude of headcount reductions, other restructuring initiatives and capex cuts across the mining sector suggest a weaker 2013 outlook than Boart's management is currently indicating. Supporting this view is the expectation pricing cuts for Boart's services should also offset some of the cost cutting initiatives being introduced.

Credit Suisse is also cautious on the outlook for 2013, this as Boart Longyear at present is only 20-30% of the way through contract negotiations for the period. Currently the broker is forecasting a 15% decline in global explorations pending next year, with 7% falls in prices for drilling services and 1% for drilling products.

In the view of JP Morgan the indication from Boart Longyear management that demand will stabilise in 2013 is premature, as to date there has been no meaningful recovery in equity raising activity by junior miners and large miners remain committed to reducing capex spending. As well, Credit Suisse is modelling around US$55 million in cost cuts for Boart Longyear, which is below the $70 million target of management. 

With management having lowered earnings guidance brokers have adjusted their models, with changes to earnings estimates generating reductions in price targets. The FNArena database shows a consensus target for Board Longyear now of $1.62, down from $2.23 previously. Targets range from BA-Merrill Lynch at $1.40 to Deutsche Bank at $1.97.

Given lower earnings expectations and concerns with respect to earnings in 2013, brokers have also adjusted ratings for Boart Longyear. Citi, Macquarie and CIMB Securities (formerly RBS) have downgraded the stock, Citi to Hold from Buy and the latter two brokers to Underperform from Neutral. The database shows Boart Longyear is now rated as Buy twice, Hold three times and Sell three times. Moelis is not in the database but rates Boart Longyear as Hold.

Management's credibility coming under question and the uncertainty of earnings in 2013 are a strong enough combination for Macquarie to rate Boart Longyear as a Sell, while BA Merrill Lynch comes to the same conclusion when adding in issues such as an unattractive valuation and a somewhat irrational industry structure.

JP Morgan retains a Neutral rating given the risk to 2013 earnings expectations, while UBS argues there is little scope for share price outperformance given a combination of volume declines and pricing pressures as mining companies look to lower capex. 

Both Deutsche Bank and Credit Suisse have maintained Buy ratings on Boart Longyear, the former as the current earnings multiple and dividend yield appear attractive and the latter as the current share price appears to be pricing in too bearish an outlook for the company.

Shares in Boart Longyear today are lower in a stronger overall market and as at 1.05pm the stock was down 8.5c at $1.315. Over the past year the stock has traded in a range of $1.092 to $4.41, the current share price implying upside of more than 20% relative to the consensus price target in the FNArena database.

 

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