Company: Industrea LimitedASX Code: IDLCurrent Recommendation:...

Company: Industrea Limited
ASX Code: IDL
Current Recommendation: BUY

Current Risk Rating: High



Event: Announcement of $2.2m Grant To develop Mine Safety System



Comment: The $1 for $1 commercial ready grant is for the development of a new Driver Safety Management System (DSMS) which will become the third product in the AMT stable. To date AMT's record for product development is exceptionally strong having previously developed both the DGS (underground directional drilling tool) and CAS-CAM/Rf (collision avoidance system) in-house. Part of the funding/development will be used to enhance the already commercial CAS-CAM/Rf product and to integrate the CAS-CAM/Rf and DSMS systems.



A key aspect of this grant announcement is that it will help build scale in IDL's MeT business which will not only help IDL with internal technical projects but it will also help secure additional external contract work.



Financial Impact: There is no immediate impact to the FY08 forecasts as the benefits from the grant and the development work will be recognised steadily from FY09 onwards. While the impact will be positive from FY09 onwards it is difficult to quantify and at this stage and OML has choosen to the leave the current forecasts unchanged with upgrades likely as AMT achieves additional system sales. As a result OML's valuation remains unchanged at $0.67 per share.



Recommendation: On an earnings basis IDL is now approaching market multiples for FY08 (still at a discount for FY09 and beyond) and is closing in on OML's DCF valuation. However, OML remains of the view that IDL is the best buy in the mining services sector as it has the most significant upside potential. This potential comes from the following:

* OML's earnings estimates are conservative and based on existing contracts only;
* Synergies from amalgamating the PJB and MCE businesses;
* Additional DGC and CAS systems sales following on from the beachheads made in Russia (DGS) and with BHP & Anglo (CAS);
* Further AMT sales following the release of the DSMS;
* Additional acquisitions (IDL has no net debt and $75m in facilities from which to fund accretive acquisitions);
* WADAM - this is the business that dwarfs all others with its growth potential. Having achieved critical mass in FY07 and having recently signed distribution agreements such that WADAM can now provide complete longwall systems (at US$100m plus per system) means that this business can grow exponentially over the next 3-5 years (without requiring capital to do so). The impact of this may be felt as early as December this year following on from the China Coal Show (6-9 Nov) - as an aside it was Dec 2006 that WADAM secured its first major roof support system sale ($45m) after signing Tagor three months earlier and then representing them at the 2006 China Coal Show.