Euroz Hartleys Mining Services Day Review

We hosted a Mining Services day yesterday. Below are some notes from each of the 17 names that presented. Broadly speaking, the themes we took away from the presentations are as follows:

  • Increasing confidence of delivery in a Covid world – we are living with it, this is how we will get to X.
  • Guiding earnings the way many have has been unusual – instils above confidence.
  • Compressed multiples cannot last forever – they need to expand or their will be inevitable consolidation.

Below is mining services growth superimposed over trading metrics in relation to a basket of mining services companies:

The takeaway as we see it is that the sector has traded as low as it is currently (EV/EBITDA 4-5x) only four times before;

  1. During the GFC.
  2. When construction activity in the sector aggressively slowed 2013 – 2015.
  3. Last years COVID shock and.
  4. Right now.

Although we saw YoY EBITDA growth of 30% to FY21, it failed to translate to expanding EV/EBITDA multiples. Company guidance, generally, points to EBITDA growth in FY22 as they learn to live and thrive in today’s Covid world. We see multiple expansion as increasingly likely over the medium term and, in the absence of it, an increasing likelihood of sector consolidation.

Notes from individual presentations below:

Civmec – Pat Tallon & Kevin Deery

  • Grew strongly in FY21, however resisted guiding on FY22.
  • Growth in FY22 supported by 2H21 run-rate; market may well be focused on OPV margins.
  • Liquidity remains the key challenge.

Emeco Holdings – Ian Testrow

  • Business appears to be travelling well, with good momentum to start 1H22. We anticipate these tailwinds continue into 2H22 and FY23;
  • We see increasing likelihood of organic earnings upgrades to our FY23 estimate, plus the ongoing potential for accretive acquisitions.
  • EHL trades on FY22 EV/EBITDA of 3.1x, and EV/EBIT of 5.9x – our 12 month price target reflect undemanding FY23 multiples of 3.6x FY/EBITDA & 6.9x EV/EBIT.

Austin Engineering – David Singleton

  • Three stage strategy well articulated & to be implemented through to FY23.
  • We estimate a ~10% reduction in fixed manufacturing & overhead costs between 2H21 and FY23.
  • We see risk to upside, as Trent’s numbers do not factor in potential for meaningful revenue growth, new products, or margins in Nth America and South America ever approaching AsiaPac margins.
  • Formal guidance likely in next few months – could be a big number depending on current win-rate.

Mader Group – Justin Nuich & Paul Hegarty

  • Mader has guided to circa 25% FY 2022 growth
  • The lower end of growth looked for is supported by 4Q revenue and EBITDA run-rate.
  • Push back is capital spent and associated debt (US Growth and ROIC is supportive by much better US margin)
  • Debt is however less than 1x EBITDA = balance sheet fit for purpose
  • Regardless, if starting  on a PE of 9.3x and it grows as guided, it trades up.
  • Yielding 3%

Southern Cross Electrical Engineering – Graeme Dunn & Chris Douglass

  • Despite share price run post result still yields 6.5% and on PE of 10x
  • Construction movement restrictions in the East may yet impact, offset by stronger GP increasingly achieved on resources projects
  • Delivered good 2021 numbers and while have history of missing consensus numbers by a little, they generally don’t guide and I think that is an important distinction.
  • Guided growth is 33%; and is entirely supported by the second half run-rate.
  • Yielding 6.5%.

Imdex Limited – Paul House & Paul Evans

  • Delivered a strong set of results delivering strong growth ahead of our expectations.
  • Key to the margin improvement and consistent with the broad assertion that the quality of revenue is improving – increasing margin is the increasing % of rental and SAAS income, together with increasing production exposure and increasing portion of contribution from the Americas.
  • Trading on impressive multiples however still in systematic upgrade cycle while exploration themes continue.

NRW Holdings – Andrew Walsh

  • NWH do not usually guide; however have this year guided 22% EBIT growth.
  • This is partially reflective of the heighted uncertainty attached to the stock, however equally not something that would have been done without plenty of  conviction.
  • Recovery of claims should see a strong operating cash first half.
  • Additional contracts will be won in the normal course.
  • Despite being a high capital spend year (Karara), I would expect NWH to trade up with delivery of the 2022 growth
  • In addition, with delivery of the growth, would expect a re-rate – 9.7x is historically very low for this business given size, liquidity and track record.
  • So earnings growth plus re-rate equals share price traction.
  • Yielding 5%

Decmil Group – Dickie Dique & Alex Hall

  • FY22 contracting guidance maintained at +$500m revenue and gross margin of 8-9%.
  • We assume the village is profitable through FY22 (1H skew) – bookings have seen a big spike in utilisation, but expect to taper from October.
  • We assume utilisation falls away to very weak levels post October. If utilisation is maintained at circa 30% for balacnce FY22, it could contribute an additional $15-20m EBITDA.

DDH1 – Sy Van Dyk & Ben Mackinnon

  • Has not guided 2022, however get full run rate of 10 rigs  added during 2021 and partial contribution from a further 8 added this year.
  • Some founder stock has come out of escrow which may be holding it back a little however this provides opportunity in my view because:
    • The 11% growth we have forecast (and on which it trades on 10x), is the maths of the additional rigs
    • It doesn’t contemplate increased utilisation – 76% average 2021, current mid 85% utilisation.
    • It doesn’t contemplate rig rate increases (assuming these will be offset by increased costs)
  • It defiantly doesn’t consider the numerous acquisition possibilities that are clearly being targeted

Vysarn Limited – James Clement

  • FY22 EBITDA guidance of  $10-11m (FY21 $5.0m)
  • Up to 85% of economic iron ore deposits in the Pilbara are under the water table.
  • Point of difference is VYS own multiple Rotary Rigs – specifically, they are new vs nearest competitors operating significantly older rigs.
  • VYS trading on 2.3x EV/EBITDA (low end FY22 guidance).
  • No formal coverage.

Duratec – Phil Harcourt & Chris Oates

  • Did not guide 2022 after a disappointing 2021.
  • 2022 growth is supported by work in hand, however investors will want evidence.
  • That said, significant tendering and opportunity.

SRG Global – David MacGeorge & Roger Lee

  • After are stellar 2021 SRG is looking for a further (guided) 15% growth- equating to EBITDA of circa $54-$55m.
  • SRG is not as cheap as the others above, however is arguably set up (via guidance) to systematically upgrade as occurred in 2021
  • The nature of earnings, which is 2/3rds recurring or annuity, demands higher trading metrics all other things equal.

Macmahon Holdings – Mick Finnegan, Peter Pollard & Chris Chong

  • Result was in-line on earnings, but much better on cashflow and balance sheet. 
  • Our FY22 estimate is EBITA of $102.5m, with guidance set at $95-105m.  Company has a long history now of meeting guidance, so we are comfortable. 
  • Very detailed medium term guidance/confidence, including a returns target.  
  • The order book run-off is slow, suggesting good visibility/confidence in growing earnings in FY23 and FY24. 
  • Batu Hijau and Elang are big potential project wins.  Additional, company has a good slide of diversified tender book.
  • Well run business now and worth a look.

Perenti Global – Mark Norwell, Peter Bryant & Jeffrey Sansom

  • Even just NSW opening international borders would be a positive change for PRN getting people in and out.
  • Company confident it is targeting returns properly.
  • Guidance is FY22 EBITA $165-185m.
  • Presentation included focus on Idoba, which has minimal current financial impact but perhaps can add to competitive advantage over time.

Mineral Resources – James Bruce & Mike Grey

  • Presentation was focused on mining services.
  • MIN doing a great job executing projects quickly in tight market – shows it can be done. Getting people is not the problem – managing and paying people is the hard part.
  • Update on Ashburton and downstream lithium projects due shortly – could be big catalysts.

Swick Mining Services – Kent Swick, Jitu Bhudia & Brett Giroud

  • Provided a strong set of FY21 results to the market highlighting performance of the underlying drilling business.
  • We expect the strong cashflow generation and commitment to demerge Orexplore business by end of CY’21 to be well received by investors
  • We continue to see enormous value to investors under a separated group structure.
  • Trading on 2.4x FY22 EV/EBITDAOur 4x target multiple remains entirely undemanding compared to recent acquisitions in the sector at ~5x/6x.

MACA Limited – Mike Sutton & Peter Gilford

  • FY22 guidance for revenue of $1.4b, of which ~$1.2b is mining (higher margin and more likely to be recurring).
  • Pipeline of $2.4b for FY22 and $2b for FY23 suggests good potential for contract news flow and further upgrades.
  • 2H21 mining margins were lower than anticipated (16.9%) and reflect our lowered assumption in FY22.
  • FY22 p/e 6.3x, EV/EBITDA 2.2x and EV/EBIT of 6.0x.
  • NTA is $1.04 – makes no sense why it’s at such a discount.


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