While Ausdrill's reported net profit for the first half of fiscal 2013 was marred by significant one-off costs, the normalised earnings were reasonable, albeit affected by work deferrals and a slowdown in mining activities. Sales increased 14 per cent to $579 million during the period, while normalised net profit and earnings per share (EPS) were flat year-on-year at $57 million and 18.8¢, respectively. The interim dividend was maintained at 6.5¢ a share, fully franked.
The company ended the period with $481 million in net debt, an increase of just more than $240 million during the six months, on the back of a negative cash-flow outcome as well as the payment for acquisition of the BTP equipment hire business. However, gearing (net debt-to-net debt and equity) remains reasonably sound at 38 per cent, with interest cover at more than nine times.
At the operating level and focusing on Ausdrill's two key divisions, the Mining Services Australia (MSA) business had stagnant earnings, as slower mining activities and work deferrals, particularly from Fortescue Metals, affected margins. The Contract Mining Services Africa (CMSA) segment reported a strong performance, helped by the start of the Syama contract in Mali, although the result was below expectations due to adverse weather hitting exploration services.
As with most other mining services providers, Ausdrill has been hit by volatile commodity prices and the resultant slowdown in the activities of its customers. Due to its concentrated exposure to the gold sector, the effect on the company has been even more acute, given the weakening gold price since October 2012.
It is, therefore, not surprising that management has provided a rather subdued earnings guidance, targeting a reported net profit for the full fiscal 2013 year to merely match the $112 million posted in fiscal 2012.
Looking beyond these near-term headwinds, the outlook is reasonably positive. We remain constructive on the gold price longer term because we see no immediate end to the money-printing efforts of the major central banks. This expected recovery in the gold price should drive increased activities and production among Ausdrill's mostly top-tier goldmining customers.
The company's significant mining services presence in Africa (more than 30 per cent of group revenues) also provides geographical diversification and a point of differentiation to its peers, with no shortage of work for Ausdrill to tender in the medium term.
The stock has had a roller-coaster ride. It is down 24 per cent in the past year due to the volatility of commodity prices and uncertainty over mining activity levels. However, the stock price has rebounded 25 per cent in the past three months, driven by a reset of the market's expectation of Ausdrill and a return of investor confidence.
Despite the recent rally, the stock is trading at an attractive 7.6 times fiscal 2013 consensus EPS estimates and 2.9 times earnings before interest, tax, depreciation and amortisation (EBITDA).
While the low multiples may be justified partly on the basis of the company's capital intensity, we regard the discount to the market to be excessive. The stock is also yielding more than 5 per cent, fully franked. Consequently, we believe the stock is worth buying at present levels.
Brian Han is senior research analyst at Fat Prophets sharemarket Tresearch.
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