MELBOURNE (Dow Jones)--Five brokers Thursday cut their price targets and profit estimates for Boart Longyear Ltd. (BLY.AU), the world's largest drilling company, on expectation that its sales will decline rapidly in the next two years as miners globally cut capital spending aggressively.
Boart's Chief Operating Officer Craig Kipp told a conference call Wednesday that the U.S.-based, Sydney-listed, company is bracing for weaker demand for its drilling services and products next year.
To combat declining demand, Boart is cutting its workforce and reviewing its dividend policy, Kipp told the call.
Boart's outlook has deteriorated with uncertainty surrounding miners' unwillingness to commit new funds for exploration, drilling or output expansion as a result of the weaker demand for metals, the brokers said in client reports.
At 0105 GMT, shares in Boart were down a 1.5 cents to 20.5 Australian cents. The company sold stock in an April 2007 initial public offer at A$1.85 each. Its shares peaked at A$2.71 in October 2007.
"The group is just at the start of a major cyclical downturn, and the associated earnings and balance sheet risks may remain a burden for the shares," ABN AMRO said in a note.
ABN said Boart's revenue next calendar year may fall 25% and its earnings per share by 44% to 5 U.S. cents, and anticipates 2010 also will be a soft year, cutting its EPS estimate by 61% to 2 U.S. cents.
"Given the balance sheet pressure we now assume that no dividend is paid in 2009 and 2010," ABN analysts wrote.
ABN, which retained its Hold recommendation on the stock, cut its price target to A$0.30 from A$0.60.
While cost cutting and improved working capital management will boost Boart's free cash flow and pay down debt, the company's earnings volatility and risk is expected to remain high, UBS analysts said in a note.
UBS cut its target to A$0.80 from A$1.20. It also cut EPS forecasts for this and next fiscal years and fiscal 2010 by 1% to 13.4 U.S. cents, by 19% to 9 cents and by 16% to 7.2 cents, respectively, to reflect falling earnings from Boart's drilling services and products units.
Goldman Sachs JBWere, in a client note, cut its recommendation on the stock to Hold from Buy, and its target to A$0.47 from A$0.96, on a lack of earnings visibility and increased risk, and said the stock is unlikely to outperform in the next six months.
GSJBW also cut its fiscal 2009 and 2010 earnings estimates by 10.8% to A$174.3 million and by 15% to A$118.4 million, on revenue declining by about 25% in 2009 and a further 10% in 2010.
"With 15% of rigs idle, Boart now expects fiscal 2009 revenue growth may be minus 20% to minus 30% but said demand remains uncertain as customers push out contract negotiations to the first quarter," Merrill Lynch said in a report to clients.
Merrill cut its price objective for Boart to A$0.20 from A$0.50. It also cut net profit for this and next fiscal years and fiscal 2010 by 5% to US$196 million, by 48% to US$46 million and by 58% to US$32 million, respectively.
"With limited fiscal year 2009 visibility, we believe there could still be downside risk to our new estimates," said Merrill's analysts, who rated the stock at Underperform.
"While there may be considerable upside should the cycle rebound, we believe demand visibility will not emerge until at least the second quarter," they wrote.
Credit Suisse is forecasting a 30% reduction in Boart's sales next year, and cut its earnings estimate by an average of 35% through to 2010 and its target on the stock to A$0.50 from A$0.85.
While Boart stock may appear to be oversold, "it is hard to get excited and pound the table," CS said in a client note, adding the shares may only appeal to "the deep value investor."
Citi, which didn't alter its earnings estimates, A$0.35 target or Hold recommendation on Boart, said in a note that while the company may look cheap, "most investors may find cheap stocks elsewhere and choose to stick with those tried-and-true names."
"With no-one having any idea where earnings will end up, concerns on Boart's balance sheet are unlikely to go away quickly," Citi analysts wrote.
BLY Price at posting:
16.1¢ Sentiment: None Disclosure: Not Held
