##{"id":60038,"date":"2012-06-01T11:16:44","date_gmt":"2012-06-01T01:16:44","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/06\/01\/citi-initiaties-with-a-buy-on-ausdrill\/"},"modified":"2012-06-01T11:16:44","modified_gmt":"2012-06-01T01:16:44","slug":"citi-initiaties-with-a-buy-on-ausdrill","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/06\/01\/citi-initiaties-with-a-buy-on-ausdrill\/","title":{"rendered":"Citi Initiaties With A Buy On Ausdrill"},"content":{"rendered":"

\n\t – Citi<\/span> initiates coverage on Ausdrill<\/span> with a Buy
\n\t – Broker sees value at current levels
\n\t – Growth from diverse exposure and entry into new market sectors
\n\t – Stock now covered by 7 of 8 brokers in FNArena<\/span> database<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tIn April, FNArena<\/span> noted UBS initiated coverage on mining services group Ausdrill<\/span> ((ASL<\/span>)) with a Buy rating (see: Ausdrill<\/span> Winning Admirers, FNArena<\/span>, 23\/4\/12). Now coverage of the stock among brokers in the FNArena<\/span> database is almost complete following Citi's<\/span> initiation on the stock this week, also with a Buy recommendation.<\/p>\n

\n\tThe driver of Citi's<\/span> positive view is valuation, as the broker's valuation and price target for the stock is $3.90, which is a premium of around 19% to the current share price. Multiples used in generating this valuation are based on peer valuation benchmarks, adjusted to reflect Ausdrill's<\/span> exposure to Africa.<\/p>\n

\n\tThe other positive for Citi<\/span> is Ausdrill's<\/span> exposure to strong, long-term demand drivers given its specialist services provide exposure to a number of commodities and to mine production in both the Australian and African markets. <\/p>\n

\n\tAs Citi<\/span> points out, Ausdrill<\/span> is exposed to the exploration, construction and production phases of the mining cycle. This exposure is lower risk relative to many other mining services groups given more of Ausdrill's<\/span> earnings are generated from production support related work and are based on longer-term contracts.<\/p>\n

\n\tAusdrill<\/span> will also be a beneficiary as mine development moves into production, with Citi<\/span> expecting the Drill and Blast division to gain from a national ramp-up in mine production. The fact Ausdrill's<\/span> exposure is more to mine production rather than construction suggests to Citi<\/span> there are fewer near-term risks for earnings from project delays.<\/p>\n

\n\tAusdrill<\/span> is well placed to deliver significant revenue growth from Africa thanks to its mining services joint venture with Barminco<\/span> and its own African Services division. Supportive here in Citi's<\/span> view is the expectation gold and copper production through Africa should ramp up rapidly in coming years.<\/p>\n

\n\tIn terms of new growth areas for the company, Citi<\/span> sees potential from growth in the group's Laboratory Services division, as well as moves into the underground mining and coal seam gas markets in Australia and hydrogeological<\/span> services or water well drilling.<\/p>\n

\n\tWith respect to earnings expectations, Citi<\/span> is forecasting earnings per share (EPS) for Ausdrill<\/span> of 36.6c in FY12<\/span> and 42.5c in FY13<\/span>. These forecasts compare to consensus EPS estimates for Ausdrill<\/span> according to the FNArena<\/span> database of 36.7c this year and 41.8c next year.<\/p>\n

\n\tSince 2002, Citi<\/span> notes Ausdrill<\/span> has generated annual compound revenue growth of 22% and EBITDA (earnings before interest, tax, depreciation and amortisation<\/span>) of 28%. This translates into return on equity of about 16.5%, which Citi<\/span> notes is well below mining services peers. In Citi's<\/span> view this is explained by the fact Ausdrill<\/span> owns its own fleet and so sacrifices some returns on equity.<\/p>\n

\n\tIn coming years Citi<\/span> expects earnings growth will be slower, the broker forecasting capitalised<\/span> annual growth in EBITDA of 13.5% through FY14<\/span>. In relative pricing terms Ausdrill<\/span> is currently trading on a FY13<\/span> earnings multiple of 7.7 times, which is below its long-term average of around 9.0 times. <\/p>\n

\n\tThe current multiple is also below that of Australian mining services peers. Given good growth prospects Citi<\/span> sees value at current levels as the earnings outlook suggests a premium to peers is justified. Yield adds to the attraction of an investment in Ausdrill<\/span>, as on Citi's<\/span> numbers the company offers a fully franked yield in FY13<\/span> of 5.2%, rising to 5.8% in FY14<\/span>.<\/p>\n

\n\tMost of the market agrees, as the database shows Ausdrill<\/span> is rated as Buy six times and Hold once. The neutral view comes from BA Merrill Lynch and is a valuation-based call. The consensus price target for Ausdrill<\/span> according to the FNArena<\/span> database is $4.47, with targets ranging from Citi<\/span> at $3.90 to UBS at $5.00.<\/p>\n

\n\tShares in Ausdrill<\/span> today are down slightly in a weaker overall market and as at 10.50am the stock was 0.5c lower at $3.295. Over the past year the stock has traded in a range of $2.52 to $4.34, while the current share price implies upside of around 36% relative to the consensus target in the FNArena<\/span> database.<\/p>\n

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\n\tFind out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"