Small Caps | Sep 10 2021
This story features DDH1 LIMITED. For more info SHARE ANALYSIS: DDH
Drilling contractor DDH1 is on the expansion trail, beating forecasts in its maiden results as a listed company
-Strong rig utilisation and revenue per shift in FY21
-Mobility restrictions, labour shortages remain an obstacle
-DDH1 retains strong operating leverage when conditions normalise
By Eva Brocklehurst
While the pandemic remains a lingering threat in terms of labour supply and costs, drilling contractor DDH1 ((DDH)) is now firmly on the expansion trail. In the company's maiden year as a listed entity brokers were impressed with the growth in the rig fleet and drilling revenue.
Moreover, Moelis notes revenue per shift was higher at $6486 in FY21, which compares with prospectus estimates of $6395. Operating earnings rose 15.8% to $74.6m, reflecting a lower margin from higher costs relating to pandemic impediments.
A final dividend of 2.18c was declared, again ahead of expectations. DDH1 is now enjoying rig utilisation of 76.6%. Moelis notes utilisation peaked at 89% in FY11, signalling capacity for further increases over the next few years.
Gold has dominated the company's business, followed by iron ore and gold/copper. There is no exposure to coal-related drilling activities while there has been an increase in activity in battery minerals, including nickel and lithium.
The business continues to assess acquisitions, homing in on successful operations with proven track records. DDH1 has the largest surface fleet across Australia, expecting rig numbers will reach 105 by the end of 2021.
Macquarie notes the top 10 clients account for 56% of the company's revenue and the business is positioned as a leader in a tight market. While there was no guidance for FY22, the broker remains confident of around 13% growth in earnings per share.
Moelis estimates FY22 operating earnings (EBITDA ) of $83.9m, based on an assumed average utilisation rate of 78% and average price increase of 5%. The broker highlights this is a conservative estimate, allowing for the ongoing impact of any mobility restrictions and labour challenges.
Tight demand and supply underpin Bell Potter's assumptions too. While acknowledging, on the east coast, the lockdowns present operating challenges, the broker emphasises the Queensland/Western Australia border is most important for DDH1.
The negative aspects of the latest results include cost increases resulting from logistics issues, with restricted access to the DDH1 workforce because of border closures and quarantine requirements.
Macquarie welcomes the exit run-rate from the second half of FY21 although acknowledges cost pressures associated with emerging labour shortages in Western Australia in particular could affect the year ahead.
The broker notes, in FY21, DDH1 received a apprenticeship wage subsidy provided by the federal government for enrolling new field staff into accredited training programs which has offset some additional costs from operating in a pandemic.
Bell Potter agrees cost pressures are hindering margin expectations but still expects the robust utilisation rates and prices to drive higher gross profit and earnings per average rig in FY22.
The expected increase in utilisation and the planned fleet expansion signals another year of strong growth and while supply of labour and equipment is constrained Moelis believes this should facilitate better price realisation.
DDH1 is one of the broker's key picks in the sector and a Buy rating and $1.65 target are retained. Bell Potter expects strong operating leverage as conditions normalise and reiterates a Buy rating with a $1.48 target while Macquarie has an Outperform rating with a $1.45 target.
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