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Analyst report - shares
"Stock of the week": Imdex Limited
October 15, 2007
Tim Morris, wise-owl.com analyst
Stock: Imdex Limited
Code: IMD
Since our article on Swick Mining Services (SWK) a few weeks back, the stock has performed quite strongly, indicating that the sentiment towards companies that service the mining industry is favourable. When you consider that global budgeted mineral exploration expenditure for 2007 lies at a record $US10bn, 33% higher than last year, it is hard not to be bullish on the sector, which is why today we profile another promising mining services company, Imdex Limited (IMD). Imdex also provides drilling services to the mining industry, however unlike Swick, the company has a global presence and a broader product and service offering.
Imdex services the exploration, mining, oil and gas, water well, and civil industries. It is a leading global supplier of technologically advanced down hole instrumentation, fluids and chemicals.
The company operates two divisions, fluids and chemicals, and products and services. The fluids and chemicals division supplies the liquid agents that lubricate and cool the moving parts of a drill rig to other rig owners and operators. These fluids and chemicals are necessary to keep a drill rig running smoothly. The products and services division focuses on supplying the actual drilling rigs and instruments to mining companies.
Through a two pronged approach of expanding organically and via acquisitions, Imdex has been recording outstanding growth and is now represented in all major mining and exploration regions across the world including Europe, Africa, Asia Pacific and the Americas. Since 2003 the growth has been steady and consistent, with revenue and operating earnings increasing every year.
Revenues have been increasing consistently. Source: Imdex
The recent spate of acquisitions is set to slow in the coming year as the focus switches to group consolidation, however the company is well poised to build on its worldwide distribution and supply network, which has seen it enter agreements with global drilling heavyweights, Sandvik and Boart Longyear.
Imdex’s most recent result was a blockbuster, exceeding guidance. Net profit for the full year to June 2007 was up 69% to 13.5m, driven by strong growth in revenue, which was up 79% to $119.3m. A focus on shareholder value has been maintained as diluted EPS rose 34.4% to 8c. The magnitude of this rise is lower than the increase in company profits because of additional share issues made throughout the year to fund working capital, acquisitions and retire debt, however it is still impressive. The result was boosted by the partial contribution of 3 significant acquisitions made during the year.
Since the start of the new financial year, several more acquisitions have been announced. The Canadian based Poly-Drill is set to provide a solid base from which IMD can expand into the North American market. Management have indicated that a move into the US is a priority. At 3.5x current year EBIT, the purchase price is favourable considering Poly-Drill’s growth profile, with operating earnings forecast to increase by 50% this year.
Imdex has also acquired a 75% interest in Suay Energy Services, which provides services to the Kazakhstan oilfields in the Caspian Sea region. Suay’s business mix complements Imdex’s current offerings, and provides exposure to the onshore market estimated to be worth $100m pa. Although profitable, the company is still in its infancy and thus needs outside backing to expand. The purchase price represents just over 3.5x last years profit before tax.
To minimise the dilution of shareholders value, part of its acquisition spree has been fuelled by debt. Imdex’s gearing levels are high, but to what degree depends on how you measure it. Based on solely total borrowings, debt to equity levels have risen to 52%, up from 8.9% last year. However if total liabilities are used, debt to equity stands at 95.5%.
The increase in interest costs has eroded profit margins slightly, from 11.95% to 11.33%, however the company’s ability to meet these financing costs has strengthened. Imdex’s cash position at June 30 sits at over $15m, up from $6.4m last year thanks to its recent cap raising and solid operational performance. Importantly, cash provided by everyday operations continues to improve, being 60% higher than last year.
Despite the improved cash position, and regardless of which way gearing is assessed, it appears that the spare debt capacity used to fund the company’s recent acquisition spree is close to full utilisation. Therefore we expect the focus for the year ahead to be on group consolidation, by bedding down recent acquisitions. However growth in the bottom line should continue to come organically, from full year contributions of recent acquisitions, and synergies arising from group consolidation.
The integration and management of recent acquisitions is a key risk facing Imdex. It is possible that these businesses fail to meet performance expectations, creating a drag rather than boosting the overall company’s bottom line, which has the potential to be a double edged sword considering their high debt levels.
Like all companies exposed to the resources sector, Imdex faces the risk of a slowdown in mining activity. This could occur if raw material hungry nations such as China experienced a slowdown in growth. The company’s fortunes are also tied to commodity prices, which are used to gauge the health of the resources sector. A prolonged slump in prices would reduce the number of viable projects across the world and see a slowdown in exploration.
However being leveraged to minerals exploration spend is not a bad thing in the current environment, as the sector should continue to provide favourable long term growth opportunities for Imdex.
In their outlook for the year ahead, management said that revenues should rise 15% on margins similar to those achieved this year. Although this is modest relative to the current performance, it has set expectations lower, leaving a lot of room for upside surprises later in the year. On this guidance, the stock may seem fairly priced, trading on 19 times current year earnings, however investors need to consider the long term growth prospects that Imdex’s global supply and distribution network could potentially support.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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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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