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Resource Equipment Ltd (RQL) - BUY

1H12 preview: robust growth leading into 2H12

Recent headwinds predominantly relating to uncertainty surrounding the renewal of a major contract with Consolidated Minerals (Woodie Woodie mine) have weighted on RQL's share price in recent months. We remain confident renewal will occur in the coming months. Our forecasts imply strong earnings growth in 1H12 continuing into 2H12. This is backed up by management commentary at the AGM noting a FY12 earnings split of 40:60. We retain our BUY recommendation and $0.71 price target.

1H12 result preview. RQL will report its 1H12 result on Thursday 23 February. We are expecting EBITDA of $10.4m and NPAT of $6.5m, implying growth of 33% and 30% respectively. We assume no tax payments in 1H12. Considering the increased shares following the September 2011 options issue, we forecast EPS to grow by 10% to 2.6 cps.
Solid earnings rolling into the 2H12. Following non-renewal of its FMG contract, DSA will likely report a weak 1H12 result. A more normal contribution from DSA in the 2H12 and a stronger result from RQL's dewatering business are required to achieve our FY12 targets. This is dependent on timing of new contract flow. Our FY12 forecasts imply 34% EBITDA growth and 9% EPS growth (lower due to initial tax payments in 2H12 and higher shares).
Woodie Woodie contract up for renewal. Market concern relating to renewal of the Woodie Woodie contract remains. Initiation of contract renewal discussions is anticipated in coming weeks and positive conclusion in the coming months would be a significant catalyst for RQL. In the interim, RQL continues to work on-site under a non-binding Letter of Intent (has been doing so since May 2011). We note that RQL has been on-site at Woodie Woodie since 2003.
Cheap ahead of new contract commentary. RQL is currently trading at an inexpensive multiple of 7.8x FY12 PE and 5.5x FY12 EBIT. We believe new contract commentary as flagged at the AGM could provide a positive surprise and thus be a share price catalyst.