Australia | Jun 01 2012
– Citi initiates coverage on Ausdrill with a Buy
– Broker sees value at current levels
– Growth from diverse exposure and entry into new market sectors
– Stock now covered by 7 of 8 brokers in FNArena database
By Chris Shaw
In April, FNArena noted UBS initiated coverage on mining services group Ausdrill ((ASL)) with a Buy rating (see: Ausdrill Winning Admirers, FNArena, 23/4/12). Now coverage of the stock among brokers in the FNArena database is almost complete following Citi's initiation on the stock this week, also with a Buy recommendation.
The driver of Citi's positive view is valuation, as the broker's valuation and price target for the stock is $3.90, which is a premium of around 19% to the current share price. Multiples used in generating this valuation are based on peer valuation benchmarks, adjusted to reflect Ausdrill's exposure to Africa.
The other positive for Citi is Ausdrill's exposure to strong, long-term demand drivers given its specialist services provide exposure to a number of commodities and to mine production in both the Australian and African markets.
As Citi points out, Ausdrill is exposed to the exploration, construction and production phases of the mining cycle. This exposure is lower risk relative to many other mining services groups given more of Ausdrill's earnings are generated from production support related work and are based on longer-term contracts.
Ausdrill will also be a beneficiary as mine development moves into production, with Citi expecting the Drill and Blast division to gain from a national ramp-up in mine production. The fact Ausdrill's exposure is more to mine production rather than construction suggests to Citi there are fewer near-term risks for earnings from project delays.
Ausdrill is well placed to deliver significant revenue growth from Africa thanks to its mining services joint venture with Barminco and its own African Services division. Supportive here in Citi's view is the expectation gold and copper production through Africa should ramp up rapidly in coming years.
In terms of new growth areas for the company, Citi sees potential from growth in the group's Laboratory Services division, as well as moves into the underground mining and coal seam gas markets in Australia and hydrogeological services or water well drilling.
With respect to earnings expectations, Citi is forecasting earnings per share (EPS) for Ausdrill of 36.6c in FY12 and 42.5c in FY13. These forecasts compare to consensus EPS estimates for Ausdrill according to the FNArena database of 36.7c this year and 41.8c next year.
Since 2002, Citi notes Ausdrill has generated annual compound revenue growth of 22% and EBITDA (earnings before interest, tax, depreciation and amortisation) of 28%. This translates into return on equity of about 16.5%, which Citi notes is well below mining services peers. In Citi's view this is explained by the fact Ausdrill owns its own fleet and so sacrifices some returns on equity.
In coming years Citi expects earnings growth will be slower, the broker forecasting capitalised annual growth in EBITDA of 13.5% through FY14. In relative pricing terms Ausdrill is currently trading on a FY13 earnings multiple of 7.7 times, which is below its long-term average of around 9.0 times.
The current multiple is also below that of Australian mining services peers. Given good growth prospects Citi sees value at current levels as the earnings outlook suggests a premium to peers is justified. Yield adds to the attraction of an investment in Ausdrill, as on Citi's numbers the company offers a fully franked yield in FY13 of 5.2%, rising to 5.8% in FY14.
Most of the market agrees, as the database shows Ausdrill is rated as Buy six times and Hold once. The neutral view comes from BA Merrill Lynch and is a valuation-based call. The consensus price target for Ausdrill according to the FNArena database is $4.47, with targets ranging from Citi at $3.90 to UBS at $5.00.
Shares in Ausdrill today are down slightly in a weaker overall market and as at 10.50am the stock was 0.5c lower at $3.295. Over the past year the stock has traded in a range of $2.52 to $4.34, while the current share price implies upside of around 36% relative to the consensus target in the FNArena database.
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