In theory, companies these days are not supposed to announce...

In theory, companies these days are not supposed to announce 'surprises'... esp to the downside. However, I'm expecting that SWK will release a result on Monday 27th that is far stronger than many are forecasting. However, it's hardly a 'surprise' when one examines the past 2 years of results, presentations and updates. It's clear that SWK have been in a turnaround situation. They have specialised their fleet, reduced debt to zero etc. This is my finding which is certainly more optimistic than the 'consensus:

'Swick Mining Services is a market leader in the provision of underground diamond drilling services through the introduction of the award winning Swick Mobile Diamond Drill, an innovative, highly mobile jumbo mounted underground diamond drill rig that sets industry benchmarks for productivity, safety, value and versatility.

The Swick Mobile Diamond Drill was developed by Swick Mining Services to provide a fully integrated mobile drilling solution to overcome the design limitations of existing rig configurations. Swick Mining Services was the first drilling contractor in Australia to successfully achieve the widespread commercialisation of a mobile underground diamond drill rig. The innovative design offers unparallelled mobility.

The ability of the Swick Mobile Diamond Drill to deliver superior productivity and versatility provides excellent value to clients, reducing underground logistical support and management, non-drilling charges and the number of rigs and personnel required on site, which in turn reduces supervision, flight and accommodation requirements.'

I've tried to find how SWK can leverage their business. They can't do this in a traditional sense, but instead use a quality/efficiency/production focus to gain business from their opposition. They have a considerable 'competitive advantage' and it's bringing-in the bacon.

ARPOR for FY12 is $208,000/month/rig in revenue. Multiply by 62 and its $154,752,000 for FY13. So NPAT boils down to 3 items. A) Margins, B) CAPEX and C) Amortisation and Depreciation. I'm not good with accounting so won't comment much re C. Tax paid is also an important item.

My assumptions are based on the IV by SWK in early August that gross return per rig will increase by about 3% in FY13. But labour costs go up. However, CAPEX is continuing to fall. New rigs are required and old stuff is refurbished. As explained by the company MD the workshop is much more effecient and that reduces cost per item substantially. Plus i expect CAPEX to drop substantially in FY13. A&D to remain the same.

Profits depend on margins/item and # of items sold. We know SWK will have 62-65 rigs operating by 2HFY13. Quite likely more if things pickup in N.America. SWK can't ask for too big an increase as competition is considerable. So it has to gain margin by getting more and more efficient. It can do this in 2 ways. A) WA is about the most expensive place to do business outside of Monaco. Nevertheless, streamlining in their workshop has seen improvements which reduce cost to build each rig. Hard to quantify exactly but let's say 4% in 2HFY12 and another 8% in FY13. The other way SWK gains work is by making each rig more productive using better technology. It is continually making improvements... some are significant. Combine gains in workshop effeciancy with increases in productivity, and it ensures SWK stay ahead of their opponents. If capex drops as much as i expect and more rigs slowly enter into work then future looks solid. SWK doesn't have the leverage to POG that a Au producer has. But it has safety in that most contracts are 2-3 years in length.

SWK have noted they often don't have to keep re-tendering. Saves effort, money and transfer costs. Repeat business is the best indicator clients are happy. I would prefer the barriers to entry were higher, but UG Diamond drilling is less competitive than surface drilling... by a considerable margin.

Swick is an investment made primarily on its competitive strengths (not a macro play). The fact that Swick continues to increase its market penetration during the economic adversity suggests that Swick’s drilling system has real credibility. Swick's competitive advantage is it's technological edge and fact it is biggest UGD company in Oz. It has a reputation and runs-on-board. Debt will be erased (finally) by June 2012. I feel 2HFY12 is the period in which SWK has been able to accelerate profits after a tough 4 year period. Here are my guesstimates. Essentially I've boosted the 1HFY12 figures by 33%. Tax is a big unknown.

FY12 EBITA 29.2m
FY12 NPAT 10.18m
FY12 EPS 4.31c
PE @ 26c 6.03

FY12 total divs 1.4c. i.e. final div of 0.9c. i initially wrote 0.7c but I'm going higher. SWK can afford higher divs as debt is gone... hopefully never to return.



NTA 45c/share. Mainly their drill rigs and premises. The best thing is the NTA is what produces the income. Far better than capital tied-up in unproductive stuff. Even an idle machine is only one contract away from earning.

FY13 is when shareholders will receive strong rewards.

FY13 EBITA
FY13 NPAT 12.0m (an increase of 18%)
FY13 EPS 5.08c
PE @ 26c 5.12
FY12 total divs 2.5c

FY13 Div yield 9.6% (net) 13.6% gross. Here we have a growth company, zero debt paying just about the highest yield on the entire ASX!

I hope I'm right. Read through the update released on 30/07/12. it's packed with insights into Swicks operations and their strategy. Big improvements are continually being introduced. The improvements in productivity and efficiency are accumulative. Over time they make a substantial difference. As the MD states" perhaps the market doesn't understand our position".

What i would like to see in next week's report.

SWK reports are very detailed with operating cashflow, free cashflow etc. I'd like to see the following additions: ROE, ROCE, and a detailed forecast re FY13. Plus a short period between results and ex-div date.

If you have doubts re the income stream re SWL... log onto their website. The live meter, measuring 'metres driled' never stops ticking over. In underground core ALONE, this small-cap has drilled almost 4 MILLION metres!! They certainly know the business backwards. BUY imo.