Australia | Apr 23 2012
– UBS initiates coverage of Ausdrill with a Buy rating
– Buy rating supported by solid earnings growth expectations
– Earnings risk to the upside in the view of UBS
By Chris Shaw
Ausdrill is a diversified mining services company, providing services in contract mining, grade control, drill and blast, exploration, mineral analysis, procurement and logistics and manufacturing. Ausdrill operates in Australia, Africa and the UK.
Prior to this week, four of the five brokers in the FNArena database already covering the stock rated Ausdrill as a Buy. The positive views have been added to today with UBS initiating coverage with a Buy rating and $5.00 price target. This compares to a consensus price target according to the database of $4.55, ranging from BA Merrill Lynch at $4.20 to UBS at $5.00.
Supporting the positive view of UBS is the expectation Ausdrill will deliver compound earnings per share (EPS) growth of 24% over the period of FY11 to FY14. This reflects UBS's positive view of an uplift in commodity production, which bodes well for Ausdrill given 85% of the company's revenues are generated from production related activities.
For UBS, earnings risk for Ausdrill is to the upside with the broker currently 7-8% above consensus EPS estimates in both FY13 and FY14. UBS's EPS forecasts stand at 36c this year and 45c in FY13, while consensus numbers according to the FNArena database are 36.7c and 41.4c respectively.
With the company well positioned in both Australia and Africa, UBS expects positive revisions to market forecasts going forward. What should support increases to expectations according to UBS is Ausdrill's ability to generate higher margins from incremental revenues as the company invests additional capital in its business.
In the view of JP Morgan, Ausdrill's interim result in February showed management has done a good job in terms of boosting returns via investing additional capital in both Australia and Africa. With a still strong balance sheet the company is well placed to continue this investment, which supports further earnings growth in JP Morgan's view.
RBS Australia agrees, taking the view while capex is set to increase significantly over the next year or so this is justified by the opportunities available to grow earnings via this capex spend. At the same time, RBS suggests good earnings visibility for Ausdrill justifies a higher share price.
Based on its earnings growth expectations, UBS suggests an earnings multiple for Ausdrill of 11 times in FY13 is appropriate. While this would be a premium of 18% relative to the current sector average multiple it would be justified by the earnings growth on offer. As well, UBS suggests the premium would reduce as the sector in general is re-rated.
The one Hold rating in the FNArena database comes from BA-ML, who downgraded Ausdrill from a Buy in February following the group's interim profit result. While the result was better than expected the issue for BA-ML is valuation, even allowing for a continuation of positive operating leverage.
In a weaker market today shares in Ausdrill are slightly lower. At 10.30am the shares were down 1.5c at $4.175, which compares to a range over the past year of $2.52 to $4.34 and implies upside of a little more than 8% relative to the consensus price target in the database.
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