Brandrill breaks up

Way back in issue 44 we suggested Brandrill as a speculative buy at $0.30. It was one of our best recommendations of that year with the price rising 563% before our take profits recommendation of issue 75 (Take Profits - $1.99).

Now they're back near 40 cents again - and down a whopping 66% since issue 85 (Sell - $1.40). What happened?

Main business

It's quite simple really. Brandrill's main business is providing drilling and blasting services to the mining industry, mainly in Australia and South Africa. It's a highly capital-intensive and cyclical business and one that investors deserted in the wake of the mining downturn.

But Brandrill had something else going for it. It had developed a safer and better method of breaking up rock.

This 'PCF' technology is undoubtedly clever. Expectations rose that it would revolutionise the mining industry, and hey presto, Brandrill was reinvented as a technology stock.

Potholes

The market loved it but, as is often the case, the road to commercialisation proved full of potholes. To its credit Brandrill had set out various objectives for the PCF technology and one of those was to increase sales to one million cartridges per annum by 30 June 2001.

Unfortunately, those specific targets have been Brandrill's undoing. Sales have been slower than anticipated and investors have started focusing on the big picture. They have noticed Brandrill remains first and foremost a mining contractor - less than 1% of 2001 sales came from its PCF technology.

And of course, conditions in the mining industry remain pretty dismal. During 2001, sales rose 38% to $175.4m, mainly due to a merger with its joint venture partner in South Africa.

Profit actually fell 28% to $2.3m due to ongoing weakness in the Australian mining sector and even that figure was boosted by a $1.5m restatement of deferred tax benefits.

We've been negative on Brandrill since March when the stock was near $2.00. At that time the company noted poor industry conditions would affect profit, but the market took little notice until the company quantified the effect in early August, announcing its first major PCF order at the same time.

As it turns out, excluding tax benefits, the result was worse than indicated. Worse still, Brandrill noted that 'without additional sizeable orders' for PCF cartridges, profit this half would be about the same as last year.

Overall, though, the full-year result should be higher than 2001 as new projects commence during the second half. Expectations for PCF technology have deflated sharply.

It still has great potential but has been overshadowed by Brandrill's troubled main business. The market's change of emphasis means the shares are locked in a downtrend. SELL.