Perenti Global Supported By Metals Exploration

Australia | Jun 29 2020

Concerns over the balance sheet and work in hand at Perenti Global have dissipated, with the company's update supporting a robust outlook.

-Management considers the worst behind the business now
-Favourable outlook because of gold exposure
-Several substantial new tenders coming up


By Eva Brocklehurst

Perenti Global ((PRN)) (formerly Ausdrill) has provided more clarity surrounding its drilling business in the wake of the pandemic, and removed some uncertainties surrounding FY20 earnings.

Wilsons suggests investor sentiment should be buoyed by the fact management assesses the worst is behind the business now. The broker considers concerns over the balance sheet are overdone, particularly as the board has also elected to pay the deferred first half dividend of 3.5c in July.

The company's net profit guidance of $106-110m for FY20 is only -4-8% below the low end of guidance previously provided and subsequently retracted, UBS notes. Perenti Global has brushed aside the impact of the pandemic but, nevertheless, it has been material. UBS points to direct shutdowns of sites and reduced productivity, especially in underground mines.

FY21 guidance is expected at the results in late August. While erring on the conservative side and suspecting continued travel and roster impacts could affect productivity, UBS still considers the valuation attractive.

There is good visibility on the company's book across FY21-22 and the broker notes recent activity in terms of gold exploration and the forecasts for gold prices remain supportive of client profitability, and hence Perenti Global's outlook.

UBS revises down estimates for FY20 by -9%, in line with guidance. FY21 is downgraded by -13% to reflect lower expected underground margins and a Buy rating and $2 target are maintained. Canaccord Genuity, too, continues to view the stock favourably because of gold exposure, which is around 70% of revenue, and maintains a Buy rating and $1.81 target.

Improving Outlook

Although guidance implies a material fall in earnings in the fourth quarter,  the broker considers it is reasonable, given the challenges. To date most of the impact has been isolated.

The Panoramic Resources ((PAN)) Savannah project and the Hindustan Zinc Rampura Agucha project both experienced disruptions. Barminco has now ended work at the latter and Panoramic Resources has undertaken a recapitalisation.

Moreover, Perenti Global has indicated there are several substantial tenders in the offing that could generate earnings from the second half of FY21. Canaccord Genuity highlights the Sukari mine in Egypt, which has open pit work, as well as potential work with Sandfire Resources ((SFR)) in Botswana.

Wilsons believes the business is on an improving trajectory while end markets, particularly gold, are very strong, and retains an Overweight rating and $2 target. This shift in the market outlook is under appreciated, the broker adds, obscured by the African operating risks and the potential spread of the coronavirus.

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