As an owner of SWK shares, I think SWK is a very good acquisition for DDH.
I've built up what for me is a substantial parcel of SWK shares in my SMSF for many years, buying on the dips etc. I think SWK are undervalued (even at the takeover price) and have very good potential.
SWK has 70 mobile underground DC drill rigs compared to, I think, around 90 rigs in total for DDH. Most of SWK's rigs are deployed in profitable, long term contracts.
SWK mostly has contracts with miners in Australia and especially WA, but, unlike DDH, SWK also services contracts overseas.SWK has manufacturing and training facility in Perth.
SWK also manufacture highly advanced, high productivity rigs including the new GEN II rig, plus they have a DEEPEX division which manufactures and services the needs for increasingly deep drilling as miners go deeper.
SWK has started to sell their GENII rigs overseas as there are opportunities in many locations where they can't easily service drilling contracts from Australia.
SWK has a R&D group, developing world leading next generation Gen3 E-Rig automated, optionally remote controlled and electrified rigs.
Similar to DDH, SWK had struggled a bit financially with older low margin legacy contracts, but in the past year or so they have successfully been rolling them over to new higher margin contracts.
SWK's drilling business revenue in FY 21 was $154m with an EBITDA of $30.4m and a very healthy free cash flow from which they paid good dividends last year. SWK drilling future order book at the end of FY was $284m and I expected that their cash flow would increase over the next couple of years.
One drag on SWK's share price hAS BEEN THAT they were bleeding cash into Orexplore (future ASX: OXT), which will be spun off as a separate ASX listed company before DDH takes over SWK.
With the spinoff of OXT, SWK was about to emerge into high cashflow and good market conditions. My price target for SWK was well above the nominal price of the script only takeover.
SWK should fit in very well with the rest of DDH. SWK can easily operate as a good cashflow generating division of DDH, like Strike and Ranger only bigger. There are also several synergies and advantages that the takeover of SWK offers to the merged entity. e.g. a good manufacturing and R&D group, DeepEx drilling, training facilities and the ability to offer customers a fuller range of drilling services above and below group.
So I think DDH will do very well out of the takeover of SWK.
I think I will keep the DDH shares I will get from the script only takeover, as I think the combined entity has a bright and profitable future.
DDH Price at posting:
$1.24 Sentiment: Buy Disclosure: Not Held
