Australia | Nov 16 2011
– Deutsche Bank initiates on Ausdrill with a Buy
– the stock now enjoys five positive ratings out of five
– Solid order book and valuation are supportive
By Chris Shaw
Mining services companies are well supported by equity brokers at the present point in the commodities boom, as evidenced by integrated mining services provider Ausdrill ((ASL)) scoring a perfect four-for-four Buy ratings according to the FNArena database.
Ausdrill has a core business of drill and blast, grade control and production drilling services in Australia and contract mining services in Africa. The company also provides exploration drilling, assaying, equipment hire, procurement and logistics services.
Research on Ausdrill has now increased to five brokers, with Deutsche Bank also picking up coverage by initiating on Tuesday with a Buy rating. Both valuation and a solid outlook support Deutsche's positive view.
With respect to the former, Deutsche's estimates imply an earnings multiple of 12 times for FY12 and 10 times for FY13, both of which are broadly in line with peer multiples. Deutsche's estimates are based on earnings per share (EPS) forecasts of 31c this year and 36c for FY13. These forecasts compare to consensus EPS estimates according to the FNArena database of 31.5c for FY12 and 36.4c for FY13.
In terms of the outlook for Ausdrill, Deutsche has confidence in its earnings estimates given work-in-hand currently stands at $1.6 billion and the order book is robust. An additional attraction for Deutsche is Ausdrill has a solid exposure to gold and iron ore, two sectors of the commodities market where the outlook is regarded as more favourable.
Ausdrill's work is predominately at the mine production and development stages of projects, Deutsche estimating this will account for about 85% of FY12 sales. This reduces risk in Deutsche's view, as later cycle stages are less at risk of experiencing cutbacks in a downturn when compared to exploration.
Analysis of the order book of Ausdrill suggests key projects are relatively low on the cash cost curve. Deutsche also views this positively, as it reduces risks associated with these projects being deferred or cancelled. Also reducing risk is the fact Ausdrill has a number of blue-chip clients on its books, an extensive fleet of more than 500 units and an integrated product offering.
Deutsche's earnings forecasts imply 3-year capitalised annual earnings growth of 12%. There is upside risk to this estimate in the broker's view, this stemming from material contract wins or earnings accretive acquisitions.
A solid balance sheet suggests acquisitions are possible, as Deutsche estimates Ausdrill has a FY12 gearing level of 13%. Management has been relatively active in terms of acquisitions, having purchased Brandrill in 2009 and Connector Drilling in February of this year.
Key concerns in the view of Deutsche relate to the uncertainty stemming from the current global economic outlook. In the previous downturn, Deutsche notes Ausdrill experienced lower equipment utilisation rates as well as competitive pressures on contract pricing.
Having factored these risks in, Deutsche's valuation and price target on Ausdrill has been set at $3.70. This compares to a consensus price target according to the FNArena database of $3.88. Targets range from Deutsche at $3.70 to BA Merrill Lynch at $4.26.
The Buy arguments of others to cover Ausdrill are related to the fact the company has a strong order book and significant levels of contract revenues already locked in. The other attraction according to Macquarie is high levels of tender activity, as this supports the potential for earnings to receive a boost from new contract wins.
Shares in Ausdrill have moved inside a trading range over the past 12 months of $2.31 to $3.94. The current share price implies upside of almost 32% relative to the consensus price target in the FNArena database.
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