austock securities - buy

Apologies if this has already been posted and it was from when the share price was 30c but they still have a 50c target on it hence the posting


Opinion Data Highlights
Recommendation Buy
Risk Rating Medium / High
Current share price $0.30
12 month target price $0.50
DCF valuation $0.50
Market capitalisation $1373m
Company Background
Boart Longyear (BLY) is the worlds largest drilling
services provider and products manufacturer with
an estimated 24% market share and ~1200 drill rigs
(utilization <60% currently).
Geographically ~25% of revenue is derived from
each of the US, Canada and Australia.
For most of the last 12 months, BLY wasnt on
many institutional radars because of:
Debt levels - All but eliminated post raising and
likely net cash in 18 months (ex acquisitions); and
Visibility - Still not strong, but the cycle has
clearly bottomed.
We have built a model to highlight the 12-18
month lag between capital being raised and
BLY/ MDI revenue improving. Please contact us
if you would like this work. This data underpins
our bullish view on the stock.
The capital spending tap can (& will) be turned on
as quickly as it was turned off.
BLY Share Price / Volume
$0.00
$1.00
$2.00
10/07 3/08 9/08 3/09 10/09
0
500
1000
BLY Volume (m)
We upgraded BLY to a Buy in early August with a
report presentation titled A transformed &
investable play on exploration spend.
Clients. Revenue is leveraged equally between
large and small resource companies (we believe
revenue is more highly skewed to the explorers that
guidance).
Large clients such as RIO / BHP are projecting
flattish revenue next year. BLY has guided a 15%
increase in spend across the board. Given 50% of
the BLY business is mids down to explorers, where
there has been at least a 30% improvement
(funding driven), this is generally in-line with
guidance we feel.
Peers. In September, BLYs #2 peer in minerals
drilling Major Drilling reported flat revenue in 4Q.
This was slightly disappointing given #3 Layne
reported sales up 22%. Miners have deferred
exploration budgets until the new calendar year.
Indices. Post the raising, BLY is likely to move back
into the ASX100, and out of the XSO.
We like the fact that cash flows will return in a major
way when sales bounce. Many sell side valuations
are flawed in our view because capex is ramped up
from US$40m to ~US$90m within two years. This is
unlikely given rig utilization is so low. Also, many
price targets are multiple based.
Austock valuation scenarios:
1) Base: DCF valuation of $0.47; includes EPS of
2.4cps in 11F.
2) Upper: $0.59/share with a more bullish, though
attainable growth scenario. EPS of 2.8cps in
11F.
The recapitalisation lowers the risk profile for BLY
equity holders dramatically. Risks are: i) Tangible
signs of exploration spend picking up, ii) Trust in
BLY management that costs have been controlled,
iii) Product peers remain cautious.
Outlook / Investment View
Our price target is $0.50/share (and should be
materially higher 2-3 years out).
BLY is a highly geared play on a resources
recovery.
Analyst: Craig Stranger + 613 8601 2010
Austock Equities Research December Quarter 2009 2
Boart