Dated info, but still interesting.After doubling revenue each...

Dated info, but still interesting.


After doubling revenue each year for the past 3 years, management have indicated that the trend is set to continue into 2008. Provided costs remain under control, we suspect that growth in the bottom line could be just as strong.

Much of this growth is set to come from an aggressive expansion of the companys drilling capacity, which has seen the fleet of their drill rigs increase 70% over the last 12 months from 18 to 31. Funding from a share placement conducted in June has facilitated additional build programmes, which should see the rig fleet double in size from current numbers over the next 18 months.

Contract wins from blue chip clients have supported this expansion, with the company converting 100% of trials to formal contracts. In April, Swick was awarded a three year underground diamond drilling contract with Newmont Gold Corporation for up to nine rigs at the Jundee and Tanami Gold Mines. Swick has also secured underground diamond drilling contracts with Barrick Gold Corporation, Mincor Resources NL, Consolidated Minerals Ltd and Sally Malay Mining Ltd.

As the length of these contracts typically span from 1-3 years, there is some certainty over future revenue streams. Management have expressed such confidence in Swicks outlook, and currently are expecting revenues for the coming financial of $80m, which is double this years normalised figure. Should margins and costs remain under control, we expect this growth to flow through to bottom line earnings. Additional contract wins throughout the year could see these expectations rise even further.

To ensure Swicks growth ambitions remain within its control, the company has established an in-house engineering department by acquiring existing WA based engineering company, Eaton Engineers. The engineering department will continue to produce various lines of drilling consumables (i.e. spare parts) used by Swick which are currently provided by third party suppliers. This not only increases the certainty and timeliness of supply, but produces costs savings as well. In addition, the engineering department will be involved in on-going research and development programmes aimed at improving existing and developing new rigs and tooling systems. Such programmes should assist Swick in maintaining its technical competitive advantage and position itself as a drilling industry innovator.

Although the stock is hardly cheap, trading on a normalised PE of 35, we feel that the premium is warranted given its strong growth prospects. However, due to its relatively high valuation, there lies a risk that the stock could be punished if current growth expectations are not met.

Potential catalysts for such earnings disappointments include cost blow outs, as wage pressures within the resources sector are strong. Also affecting the entire sector would be a potential slowdown in economic conditions and commodity prices. Specific to Swick is the risk that its aggressive rig expansion programme is delayed, potentially impeding its growth strategy by preventing the company from pursuing additional contracts.

For those comfortable with the stocks risk profile and valuation, the next step is to consider whether current prices provide a good technical entry point. In Swicks case, the price chart paints a bullish outlook. After retreating from its record high of $1.64 in July, the stock fell to lows of $1.02 in August before staging an impressive comeback. Recent trading has seen the stock break from a triangle consolidation pattern, to make record highs once again. This is a bullish sign, and a new high would suggest the stock is set to continue on its upward trend in place since listing. On the downside, the stock remains supported above $1. This point needs to be kept in mind, because a break through this level would jeopardise the upward trend.


Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses.