Australia | Aug 31 2012
– Boart Longyear slashes earnings guidance
– Changes reflect reduced minerals exploration spending
– Brokers slash forecasts and price targets
– Ratings downgraded
– RBS fears a flow through impact for Imdex's earnings
By Chris Shaw
Record interim net profit after tax of US$74 million was where the good news stopped for resource sector service provider Boart Longyear ((BLY)), as the result was accompanied by a significant downgrade to full year earnings guidance.
A softer and increasingly uncertain drilling outlook has seen management at Boart Longyear provide EBITDA (earnings before interest, tax, depreciation and amortisation) guidance for 2012 of US$360-$390 million. As BA Merrill Lynch points out, this is more than 30% below previous consensus of around US$470 million.
The cut to guidance was driven by a number of factors, Macquarie noting these include higher rig churn as major customers move rigs to higher quality assets, some customer de-stocking and a more cautious outlook for capex from major miners.
Forecasts across the market have been cut heavily to reflect the updated guidance, as RBS Australia has cut earnings per share (EPS) forecasts by 25% this year and by 58% in FY13 and UBS by 33% and 55% respectively. Consensus EPS forecasts for Boart Longyear according to the FNArena database now stand at US38.3c and US30.4c respectively.
The larger cuts to forecasts in FY13 reflect Macquarie's view there could be further downside risk for Boart Longyear's earnings next year as falling volumes and weaker prices have yet to fully impact. As Macquarie points out, lower rig utilisation will generate pricing pressure as contracts are renegotiated, while margins in the Products division in particular will come under pressure given a relatively high fixed cost base.
With the earnings outlook for Boart Longyear now far less certain and with valuations cut to reflect new guidance, brokers have downgraded ratings for the stock. UBS, Macquarie and RBS Australia have all cut ratings to Hold from Buy, while BA-ML and JP Morgan have retained respective Underperform and Neutral ratings.
Overall the FNArena database shows Boart Longyear is now rated as Buy three times, Hold four times and Sell once. Not all FNArena database brokers have updated their forecasts as yet.
Changes to forecasts have driven down price targets, with the consensus target according to the database falling to $2.58 from $3.95 previously. Among the updates so far, RBS now has the lowest target at $1.39, while JP Morgan's revised target stands at $2.21.
One positive from the update to guidance in the view of BA-ML is that the outlook for Boart Longyear has now effectively de-risked, as current enterprise value is pricing in trough earnings. The one caveat the broker makes is this assumes FY13 proves to the trough for earnings, which is not clear at this point. Given this uncertainty, BA-ML sees further share price underperformance from Boart.
Earnings uncertainty is the main driver of Hold ratings elsewhere, UBS noting Boart has a cyclical earnings profile given the exposure to exploration spending where the outlook is far from clear at present.
RBS agrees, taking the view investors are unlikely to consider the stock while earnings visibility remains poor. This implies potential for further share price weakness before fundamentals again come to the fore, which is unlikely before at least next year in RBS's view.
Another point noted by RBS is that Boart's downgrade to earnings guidance is a negative for Imdex ((IMD)) given Boart is Imdex's largest customer and accounts for around 11% of group revenues.
The revised guidance from Boart is evidence market uncertainty is now translating into reduced exploration and development spending, which RBS expects will pressure Imdex's earnings as well.
Changes to forecasts reflect this, RBS cutting EPS forecasts for Imdex by 13-17% for FY13-FY14. This generates a cut in price target to $1.40 from $1.70, with RBS retaining a Hold rating on Imdex. Overall, Imdex is rated as Buy once, Hold once and Sell once by brokers in the FNArena database, with an average price target of $1.72.
Shares in Boart Longyear today are slightly weaker in a broadly flat overall market and as at 11.50am the stock was down 5c at $1.45, the stock having fallen heavily yesterday post the downgrade to guidance. Over the past year the shares have traded in a range of $1.435 to $4.41.
Imdex is also weaker and was down 3.5c at $1.305 as at 11.50am, compared to a 12-month range of $1.305 to $3.28.
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