Australia | Mar 14 2019
Accelerating mining activity is expected to quickly lead to improvement for Ausdrill's business as it consolidates recent mergers.
-Improved cost synergies expected from the merger with Barminco
-Underground business viewed more favourably versus open pit work
-Rising gold price and better capital markets should underpin sentiment
By Eva Brocklehurst
Mining contractor Ausdrill ((ASL)) is reorganising, lining up its fleet to take advantage of a resurgent mining sector. Brokers believe this should result in a significant lift in operating performance, capital efficiency and cash flow.
Accelerating mining activity should quickly lead to improvement for the business. Even now, Wilsons observes Ausdrill is showing double the sector earnings (EPS) growth rate while trading at a steep discount across a range of multiples.
The broker suggests investors should position for the benefits of renewed discipline and remains highly convinced of the outlook. Initial guidance from management implies FY20 net profit growth of over 25% on the current run rate. This is before any new contracts or expansion of scope. Wilsons envisages a solid buying opportunity and maintains a Buy rating and $2.40 target.
Canaccord Genuity has welcomed the substantial changes which have been made over the last six months. The company has incorporated the Barminco acquisition and adjusted African Underground Mining Services from an equity accounted joint venture to a fully integrated business. AUMS is tracking ahead of the broker's expectations.
Ausdrill has guided to net profit of $98m. The underground business is viewed more favourably, versus open pit work where the company signalled it has a more conservative view on revenue growth.
Positive Catalysts Ahead
Cost synergies relating to the merger with Barminco are now expected to be of benefit to the tune of $11m in FY20, versus prior guidance of $5m per annum. The stock has rallied 60% from its lows of last December and Canaccord Genuity believes it is now approaching fair value.
Regardless, the broker suggests a rising gold price and better capital markets should support sentiment in the short term and there are positive catalysts in the form of new contract potential.
The broker assesses Ausdrill should trade at a small discount to ASX contract to peers because of capital intensity, geopolitical risk and integration risk. However a current discount of around -28% on an FY20 PE of 8.2x is considered its excessive. Canaccord Genuity maintains a Buy rating and $1.84 target.
Moelis believes the company's strategy of reallocating capital towards higher returns and higher skilled work, such as underground mining, is sound. The underground division includes Barminco and the consolidated AUMS.
Moelis, too, does not consider the valuation demanding but until there is a stabilising of the surface business and confirmation of key contract renewals the risk/reward is looks to be balanced. Hence, a Hold rating with a target of $1.82.
Deutsche Bank hopes the company will disclose the individual businesses in its reports and continues to model AUMS and Barminco as individual entities. The broker has a Buy rating and $2.04 target.
UBS believes the risks for FY20 earnings are skewed to the upside as its estimates indicate minimal organic growth in the second half of FY19. In light of this the valuation is attractive and UBS has a Buy rating and $2.35 target. Moreover, the opportunity pipeline remain strong.
Despite supply chain challenges and wet season impacts on mining services in the first half, UBS expects minimal turnaround delays into the second half and the clean outlook should provide upside risk.
Meanwhile, underground mining margins are higher, the broker notes, up 200 basis points on the prior corresponding half. There are few contracts up for renewal in the near term, although one risk is Iduaprierm, due December 2019, because of less favourable operating conditions for non-local contractors in Ghana.
Ausdrill provides drill & blast services, grade control, water well drilling and equipment sales, hire and parts to the mining industry.
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