Australia | Sep 17 2008
By Andrew Nelson
Even news of an immediately accretive acquisition on good terms is unable to break the shackles of uncertainly restraining mining services company Boart Longyear ((BLY)). The brokers that like it, love it and most others are positively neutral, but waning mining sector sentiment seems more than strong fundamentals can overcome.
Yesterday, the company announced it has bought US drilling services business Eklund Drilling for an undisclosed sum. Credit Suisse, JP Morgan and ABN Amro, the only brokers to comment on the deal so far, estimate the purchase price will have been in the neighbourhood of US$50-US$60 million.
The deal adds 31 rigs to the groups 1,106 strong rig fleet and management expects it will also add about $50 million of annual revenues. It also includes experienced staff, addressing a key constraint in the current markets and, as Credit Suisse points out, as such the deal cements the company’s position as the only global reverse circulation (RC) drilling services provider that both manufacturers and distributes RC drill rigs.
This is the fifth acquisition the company has made in FY08, already having acquired 4 drilling services businesses and 1 drilling products business. This is in advance of its stated strategy of making 3-4 strategic value accretive acquisitions per year, with JP Morgan noting the company has not only been successful in delivering on this strategy, but management is also confident the company can continue to do so.
Not only have these recent acquisitions been positive in an ongoing sense, but according to Credit Suisse, they also provide increased comfort about the company earnings guidance of 25% revenue growth, of which 5-10% was to come from acquisitions.
In fact, this latest acquisition alone has the broker estimating it will contribute about 20% of it total earnings growth forecast. Just this one acquisition.
So why have shares fallen by 28% since the company’s inarguably positive interim results?
ABN Amro suggests the share price is being “undermined by macro concerns and, more specifically, worries about the impact of any slowdown in demand from Junior miners”, which follow on from comments from key competitor MDI. Junior mining companies account for a large proportion of exploration spend, the broker notes, and this is dependent on their ability to raise equity. Nobody is finding it easy to raise capital right now.
Is there any proof of this junior slowdown?
Not according to Credit Suisse, who notes the company’s forward order books remain at record levels and it is otherwise yet to a see any indication of demand destruction. In fact, the broker says junior mining exploration spend remains strong, and if it didn’t, it only accounts for 15% of the company’s business on the broker’s numbers.
No surprise that Credit Suisse has a buy on the stock, as does JP Morgan, while ABN Amro is sitting at hold, even though it only notes fear of a junior slowdown, not evidence of one.
One thing all brokers agree on is that the shares are trading well below valuation, which you would think assumes a very sharp drop in profits in the years to come. That just isn’t on anyone’s cards. In fact, the FNArena database is predicting 184% EPS growth forecasts for FY08 and 21.5% EPS growth in FY09, which isn’t 184%, but it’s still pretty good.
All in all, the FNArena sentiment indicator is sitting at 0.4, with 4 Buys, 3 Holds and 1 lonely sell from Citi. The average price target is $2.13, with brokers ranging from JP Morgan’s $2.56 to ABN’s $1.65. Today, shares were 2.5c higher at $1.465 versus a 12 month range between $1.425 and $2.75.