The Evolution of Imdex

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New research on Imdex points to a company in transition with less exposure to cyclical downturns for junior miners and exploration budgets.

-Over the last five years Imdex’s business has been transformed
-Jarden highlights the company’s pricing power
-Commercialisation of new technology to lift earnings
-Outlook partly dependent upon customers' upcoming exploration budgets

By Mark Woodruff

Shares of global mining technology company Imdex ((IMD)) have fallen from $3.25 in January to be currently trading near the $2.00 mark, and now some brokers are pointing to undervaluation.

The company, which operates in more than 100 countries, is commodity agnostic and assists drilling contractors and resource companies to drill faster and smarter, obtain accurate subsurface data and receive critical information in real time.

Jarden points out the company’s technology and services have all-important pricing power. While most products represent relatively insignificant costs to miners, there is potential for very large impacts upon mine costs and profitability.

Compared to the company’s long history as an ASX-listed company, the broker notes there is now greater relative exposure to mining production and tier-1 mining companies, which helps offset cyclical exposure to juniors/exploration spend.

In addition, there’s considered to be revenue and earnings upside from commercialising new technology, aided by a R&D spend of around 7-9% of revenue, suggests the analyst.

Blast Dog is a recent example of a new technology that obtains rock knowledge using the Internet of Geosensing to optimise blasts in open pits and underground.

A first commercial contract of $13m has been secured for the technology via the Iron Bridge Magnetite project in the Pilbara, a joint venture between Fortescue Metals Group ((FMG)) and Formosa Steel.

As evidence of a company in transition, revenue from Rental and software-as-a-service (SaaS) has lifted to 59% of total revenue over the past five years, up from 44%, while revenue from Mining Production has increased to 20% from 10%.

Last week, Jarden, not one of the seven brokers updated daily in the FNArena database, initiated coverage with a Buy rating and $2.42 target price.

By comparison, Canaccord Genuity, also not one of the seven, last month upgraded its rating to Buy from Hold following FY22 results and lowered its target to $2.53 from $2.74. It’s estimated shares were at their cheapest since May 2020 on an earnings multiple basis.

Within the database, Outperform-rated Macquarie retained its $2.70 target after FY22 results, while UBS kept its Neutral rating and lowered its target to $2.20 from $3.10.

Internationally, Imdex has increased its exposure to mining companies compared to drillers and has grown market share in Canada/Americas noted Jarden. These two regions now represent 47% of revenue, up from 39% five years ago.

FY22 results in mid-August revealed 44% of the company’s top 250 clients now have more than three integrated products compared to 33% in the previous corresponding period.

Macquarie observed the increasing breadth of Imdex’s products has allowed the delivery of solutions, rather than products, for clients to unlock value.

A final fully franked dividend of 1.9cps was declared, bringing the FY22 dividend to 3.4cps.

FY22 results

Macquarie assessed a solid result across the board for Imdex that was in line with expectations. Earnings (EBITDA) margins expanded for the third consecutive year rising by 220bps to 30.7% from 28.5% in the previous corresponding period.

According to UBS, the result was driven by another record period of higher margin Instrumentation revenue (up 34%), while Fluids sales also rose by 23%.

Canaccord Genuity was less impressed and felt the quality of the result wasn't great, with cash conversion a clear miss and second half growth boosted by favourable currency movements.

However, there is potential for a stronger FY23 given the recent soft cash conversion, as management sees most of its $8m investment in inventory reversing in FY23. As a result, Canaccord now forecasts FY23 cash conversion of 98%.

Outlook

Management did not provide specific guidance for FY23 though noted demand remains strong across the company’s portfolio, and despite a recent easing in capital raising, miners remain well-funded, with drilling clients reporting strong forward-looking order books.

The restricted access to mine sites, labour shortages and supply chain pressures of FY22 were beginning to ease in early FY23, according to Macquarie.

Despite the recent price falls for metals and bulk commodities, Jarden has seen no reaction from mining companies to suggest exploration budgets will be revised lower for the remainder of 2022.

However, the broker cautioned equity raisings and the setting of exploration budgets by customers in the December quarter will be crucial.

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