##{"id":60506,"date":"2012-08-31T12:12:01","date_gmt":"2012-08-31T02:12:01","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/08\/31\/boart-guidance-shock\/"},"modified":"2012-08-31T12:12:01","modified_gmt":"2012-08-31T02:12:01","slug":"boart-guidance-shock","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/08\/31\/boart-guidance-shock\/","title":{"rendered":"Boart Guidance Shock"},"content":{"rendered":"

\n\t – Boart<\/span> Longyear<\/span> slashes earnings guidance
\n\t – Changes reflect reduced minerals exploration spending
\n\t – Brokers slash forecasts and price targets
\n\t – Ratings downgraded
\n\t – RBS<\/span> fears a flow through impact for Imdex's<\/span> earnings<\/strong><\/p>\n

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

\n\tRecord interim net profit after tax of US$74 million was where the good news stopped for resource sector service provider Boart<\/span> Longyear<\/span> ((BLY<\/span>)), as the result was accompanied by a significant downgrade to full year earnings guidance.<\/p>\n

\n\tA softer and increasingly uncertain drilling outlook has seen management at Boart<\/span> Longyear<\/span> provide EBITDA (earnings before interest, tax, depreciation and amortisation<\/span>) guidance for 2012 of US$360-$390 million. As BA Merrill Lynch points out, this is more than 30% below previous consensus of around US$470 million.<\/p>\n

\n\tThe cut to guidance was driven by a number of factors, Macquarie noting these include higher rig churn as major customers move rigs to higher quality assets, some customer de-stocking and a more cautious outlook for capex<\/span> from major miners.<\/p>\n

\n\tForecasts across the market have been cut heavily to reflect the updated guidance, as RBS<\/span> Australia has cut earnings per share (EPS) forecasts by 25% this year and by 58% in FY13<\/span> and UBS by 33% and 55% respectively. Consensus EPS forecasts for Boart<\/span> Longyear<\/span> according to the FNArena<\/span> database now stand at US38.3c and US30.4c respectively.<\/p>\n

\n\tThe larger cuts to forecasts in FY13<\/span> reflect Macquarie's view there could be further downside risk for Boart<\/span> Longyear's<\/span> earnings next year as falling volumes and weaker prices have yet to fully impact. As Macquarie points out, lower rig utilisation<\/span> will generate pricing pressure as contracts are renegotiated, while margins in the Products division in particular will come under pressure given a relatively high fixed cost base.<\/p>\n

\n\tWith the earnings outlook for Boart<\/span> Longyear<\/span> now far less certain and with valuations cut to reflect new guidance, brokers have downgraded ratings for the stock. UBS, Macquarie and RBS<\/span> Australia have all cut ratings to Hold from Buy, while BA-ML and JP Morgan have retained respective Underperform<\/span> and Neutral ratings. <\/p>\n

\n\tOverall the FNArena<\/span> database shows Boart<\/span> Longyear<\/span> is now rated as Buy three times, Hold four times and Sell once. Not all FNArena<\/span> database brokers have updated their forecasts as yet.<\/p>\n

\n\tChanges to forecasts have driven down price targets, with the consensus target according to the database falling to $2.58 from $3.95 previously. Among the updates so far, RBS<\/span> now has the lowest target at $1.39, while JP Morgan's revised target stands at $2.21.<\/p>\n

\n\tOne positive from the update to guidance in the view of BA-ML is that the outlook for Boart<\/span> Longyear<\/span> has now effectively de-risked, as current enterprise value is pricing in trough earnings. The one caveat the broker makes is this assumes FY13<\/span> proves to the trough for earnings, which is not clear at this point. Given this uncertainty, BA-ML sees further share price underperformance<\/span> from Boart<\/span>.<\/p>\n

\n\tEarnings uncertainty is the main driver of Hold ratings elsewhere, UBS noting Boart<\/span> has a cyclical earnings profile given the exposure to exploration spending where the outlook is far from clear at present.<\/p>\n

\n\tRBS<\/span> agrees, taking the view investors are unlikely to consider the stock while earnings visibility remains poor. This implies potential for further share price weakness before fundamentals again come to the fore, which is unlikely before at least next year in RBS's<\/span> view.<\/p>\n

\n\tAnother point noted by RBS<\/span> is that Boart<\/span>'s<\/span><\/span> downgrade to earnings guidance is a negative for Imdex<\/span> ((IMD<\/span>)) given Boart<\/span> is Imdex's<\/span> largest customer and accounts for around 11% of group revenues.<\/p>\n

\n\tThe revised guidance from Boart<\/span> is evidence market uncertainty is now translating into reduced exploration and development spending, which RBS<\/span> expects will pressure Imdex's<\/span> earnings as well.<\/p>\n

\n\tChanges to forecasts reflect this, RBS<\/span> cutting EPS forecasts for Imdex<\/span> by 13-17% for FY13-FY14<\/span>. This generates a cut in price target to $1.40 from $1.70, with RBS<\/span> retaining a Hold rating on Imdex<\/span>. Overall, Imdex<\/span> is rated as Buy once, Hold once and Sell once by brokers in the FNArena<\/span> database, with an average price target of $1.72.<\/p>\n

\n\tShares in Boart<\/span> Longyear<\/span> today are slightly weaker in a broadly flat overall market and as at 11.50am the stock was down 5c<\/span> at $1.45, the stock having fallen heavily yesterday post the downgrade to guidance. Over the past year the shares have traded in a range of $1.435 to $4.41.<\/p>\n

\n\tImdex<\/span> is also weaker and was down 3.5c at $1.305 as at 11.50am, compared to a 12-month range of $1.305 to $3.28. <\/p>\n

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\n\tFind out why FNArena<\/span> 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":"