Small Caps | Feb 08 2023
This story features DDH1 LIMITED. For more info SHARE ANALYSIS: DDH
Drilling solutions company DDH1 has reported a record revenue half, with ongoing exploration spend in the sector set to sustain its outlook.
-DDH1 reports record first half revenue as Swick acquisition proves its worth
-Swick delivered 24% year-on-year revenue growth, supported by improved per rig revenue
-Strength in copper and gold prices should provide ongoing benefits
By Danielle Austin
Drilling services provider DDH1 ((DDH)) has proved the value of last year's acquisition of Swick with a record first half revenue result.
Providing innovative drilling solutions and geological advice to Australian mineral exploration and mining companies, DDH1’s suite of services includes deep hole diamond core drilling, reverse circulation and specialised engineering.
With seven rigs added to its fleet in the first quarter and an additional three rigs set to be brought on board in the second quarter, DDH1 will soon helm a fleet of 193 rigs. With 85% of the company’s first half revenue being derived from production and resource definition programs, which should prove more resilient than greenfield exploration activities, analysts are largely positive on the visibility of the company's outlook.
The acquisition of drilling contractors Swick was completed in February 2022, with the purchase delivering 24% year-on-year revenue growth in the first half to $97m. According to analysts, the company pushed through meaningful rate increases as a result of contract renewals.
At the group level, the company reported revenue of $286m for the half and earnings of $65.6m. With rig utilisation in line with the previous period at 77.1%, the upside was largely driven by a per rig revenue increase of 6.3% to $1.53m.
The operating earnings margin declined -240 basis points year-on-year to 22.9% during the period, with the company flagging inflationary pressures appear to be moderating. Management at the firm expects any margin improvement that will be gained from the easing of inflationary pressure will likely be seen in the next fiscal year, given a timing lag to realising cost benefits.
Brokers expect commodities outlook will continue to drive demand for drilling solutions
The company’s first half revenue beat Macquarie’s expectations by 6%, while revenue from the Swick operations was 16% better. Macquarie (Outperform, target price $1.15) points out DDH1 retains good visibility of demand for the remainder of the fiscal year, with clients intending to execute on planned drilling programs. The current macro climate should drive long-term demand for the company's services. A material downturn in commodity prices and exploration spend would represent a key risk.
Canaccord Genuity (Buy, target price $1.41) expects recent strength in gold and copper prices will provide revenue momentum into the next fiscal year, with 72% of the company’s revenue deriving from clients in both sectors.
This broker expects DDH1 is experiencing early normalisation of labour tightness and cost inflation. Finding exploration budgets to be holding strong, Canaccord Genuity has lifted its earnings forecasts for FY23 and FY24 by 5%. Offsetting this is an increase to the assumed depreciation, meaning the net profit forecast is only minimally impacted.
This broker expects Swick provided not only revenue growth in the first quarter, but also synergies that supported the company’s revenue boost. Canaccord Genuity is anticipating a net cash position of $14m by the end of the fiscal year, alongside free cash flow in excess of $60m.
Moelis (Buy, target price $1.40) highlighted despite price momentum, the shares have not been able to close the significant discount to peers. The stock continues to trade at 4.4x FY24 forecast earnings, while peers trade at an average of 8.8x. This broker points out the company identified its focus areas moving forwards as margin improvement through utilisation, productivity and rates, cash flow generation, synergies, and the renewable transition.
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