spp, page-11

Patersons have a buy on it now

http://www.psl.com.au/research/your-market-daily#ASL

Ausdrill Limited (ASL) - BUY

Balance sheet supports African growth

We have reviewed our forecasts in light of increased contracting opportunities in Africa and a higher Australian dollar. As a result we are now anticipating higher growth, putting ASL on forward P/Es of 10.5x and 8.8x for FY12 & 13 respectively. Recently lacklustre share price performance has paralleled the sector and current levels present a good buying opportunity in our view. Our blended price target is 13.6% higher at $4.33/sh and we are upgrading our recommendation from HOLD to BUY.

* Forecasts higher on African margins. We have increased our margin expectations in Africa based on improved efficiencies due to anticipated ramp-ups at key projects particularly in the underground business. After a slow start we now expect this business to double in revenue next year and the year after accompanied by significant margin increases. All told our EPS forecasts are 12.0% higher in FY12 and up 13.3% in FY13.
* AUD strength poses headwinds but mild sensitivity. The strength of the AUD relative to the USD is negative for ASL's African operations. Nonetheless we highlight that a further 10% increase in our AUD/USD assumptions (FY12F 1.0525) only decreases our price target by 3.0c/sh. The group's debt in Africa is also USD-denominated providing a natural hedge.
* Conservative balance sheet well-placed to meet capex. We have upgraded our capex assumptions over the forecast period to support our revenue targets ($140m both in FY12 and FY13). ASL generally requires a dollar of capex for every dollar of revenue gain with stay-in-business capex of circa $30-40m per annum. Following the recent $129.5m placement at $3.50/sh we forecast June '11 net cash of $7.0m.
* SPP completed. ASL recently announced the outcome of its share purchase plan (at $3.50/sh) with the company receiving approximately $2.6m in subscriptions out of a maximum $20.0m.�
* Catalysts. 1) Contract wins; 2) August reporting season.