It’s A Hot Market For Boart Longyear

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

By Chris Shaw

US minerals exploration services group Layne Christensen reported a 24% increase in third quarter earnings to US$0.42 per share, a result well above consensus forecasts of around US$0.30. The company indicated conditions in the market were very good, a trend expected to continue into next year given some customers are looking at increasing exploration budgets in 2011.

As Macquarie points out, the better than expected result from Layne Christensen is a positive for Australian-listed Boart Longyear ((BLY)) as it operates in similar markets. This is especially the case with respect to revenues for Boart, as historically these have been strongly correlated to mining exploration budgets.

Citi is similarly positive in this regard, as it estimates proposed capex in the global mining sector in 2011 will be around US$92 billion, which would be an increased of 15% in year-on-year terms. As capex and exploration budgets enjoy tight correlation, Citi sees exploration expenditure rising by as much as 20% in year-on-year terms in the coming 12 months.

As well, Macquarie notes the stronger market conditions are seeing the return of some pricing power for service companies such as Boart and Layne Christensen. This supports the broker's expectation of a 6% rise in prices in 2011.

On the back of the earnings result of Layne Christensen and revised expectations for exploration expenditure in general, both Macquarie and Citi have lifted earnings estimates for Boart Longyear, Macquarie by 5.5% in 2011 and Citi by 2-10% for FY10 to FY12.

In earnings per share (EPS) terms Macquarie is now forecasting outcomes of US17.6c this year, US29.1c in FY11 and US36.4c in FY12, while Citi is at US17.3c, US27c and US38c respectively. BA Merrill Lynch had previously identified an improvement in market conditions for Boart Longyear and lifted its earnings estimates last month to reflect this view.

The changes to earnings forecasts mean changes in price targets, Macquarie's increasing to $4.55 from $4.23 and Citi's to $4.95 from $4.35. The consensus price target for Boart Longyear according to the FNArena database now stands at $4.34, up from $4.20.

Both Citi and Macquarie already had Buy or Outperform ratings on Boart Longyear prior to the revisions to their models and these positive views have been retained. RBS Australia agrees, as while it hasn't adjusted its earnings estimates on the back of the update by Layne Christensen the broker sees potential for further share price upside of as much as 25% in Boart over the next 12 months.

With RBS Australia also rating Boart Longyear as a Buy, the FNArena database shows a total of seven Buy recommendations and one Hold rating. This comes courtesy of Credit Suisse and reflects the view Boart Longyear shares are fully value around current levels, even allowing for a pick-up in operating conditions.

Shares in Boart Longyear today are stronger and as at 11.30am the stock was up 11c at $4.26. This compares to a range over the past year of $0.295 to $4.26 and implies upside of around 2% to the consensus price target in the FNArena database.

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