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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": Swick Mining Services
September 24, 2007
Tim Morris, wise-owl.com analyst
Stock: Swick Mining Services
Code: SWK
‘Once you get a rig, you don’t let it go’ is a phrase we often hear from the CEO’s of mining and exploration companies. They are highlighting the challenges faced by resource companies across the board in sourcing drilling equipment as they strive to capitalise on booming commodity prices.
What has become a challenge for the miners and explorers is now a boon for the service and equipment providers. Swick Mining Services (SWK) evolved from a second generation family drilling company founded in the 1960s. The company now provides specialised underground and surface drilling services, with an aim to build and sustain a technical competitive advantage by constructing its own drill rigs.
Swick is a recent entrant to the ASX, listing in November last year, but has already demonstrated its ability to capitalise on the buoyant operating conditions, exceeding its earnings forecasts set out in the prospectus.
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 company’s 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 Swick’s outlook, and currently are expecting revenues for the coming financial of $80m, which is double this year’s 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 Swick’s 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 stock’s risk profile and valuation, the next step is to consider whether current prices provide a good ‘technical’ entry point. In Swick’s 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.
More articles from this week's CompareShares newsletter:
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Managed Funds: Smart funds for hardened share punters
Resident Trader: Low-risk forex trading
Smart investing: A safe haven in stormy times
Analyst report: Beaten down stocks to watch
Commodities: Gold set to continue its run
Stock of the week: Swick Mining Services
Options: Become a better share trader by understanding options
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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