BLY 0.00% 41.0¢ boart longyear limited

overpriced, page-9

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    How can this be a dog bullishamateur?


    Huntley's Recommendation: Boart Longyear Limited

    Recommendation: Buy

    BLY is one of the worlds largest global drilling services and product providers. Competitive advantages include its strong brand, global scale and relationships with blue-chip customers. Demand for drilling products and services are highly leveraged to mining and resource-related expenditure, which is slowly starting to improve following recent contraction. Restructuring plans and cost initiatives are in early stages and it is not yet clear whether they will be successful, though early signs are promising. A heavily dilutive recapitalisation program removes near-term debt issues with existing debt manageable. The stock only suits above average risk investors seeking indirect exposure to the global energy and resources market recovery.

    Event09-Nov-2009
    BLY recently completed its heavily dilutive recapitalisation program, raising US$700m before associated costs. A US$585m short-term loan was repaid in full, with the balance used to reduce an existing revolving credit facility. Debt now falls to a manageable US$100m which implies gearing (net debt/equity) of around 10-15%. All terms and conditions of the existing facilities remain unchanged including pricing and covenants, which we have discussed in our prior notes. Existing facilities mature in April 2012, which means focus now turns towards improving earnings.

    Business Impact: Any recovery in global markets should see BLY emerge in a competitive position with a lower cost base after global cost-cutting measures earlier this year. We most likely saw the bottom of the cycle in 2H08/1H09 and now estimate FY09 and FY10 EBITDA of US$129m and $193m respectively. In FY11 we expect EBITDA of US$252m, driven by higher demand for services. Our post recapitalisation FY10 and FY11 A$ EPS numbers are revised higher to 2.5cps and 3.6cps respectively, assuming an average A$/US$0.85 exchange rate over the next few years. We increase our valuation to A$0.39, which reflects an FY11 PER of 11x. Our FY11 US$ earnings estimates are still well below the peak FY09 levels. Our revised estimates assume capital expenditure budgets set over the next year will see higher demand for exploration-type projects, particularly in markets like gold where demand is strong. There could be some lag from FY10 into FY11, though this is largely reflected in our forward estimates. The product manufacturing division is key to any earnings recovery.

    Forecast Impact: --

    Recommendation Impact: Our recommendation is revised to a Buy below $0.29, where BLY trades on a revised FY11 PER of 8x. This is still a discount to industry peers, which rallied hard over the past six months.

    Event Analysis
    BLY recently completed its heavily dilutive recapitalisation program, raising US$700m before associated costs. A US$585m short-term loan was repaid in full, with the balance used to reduce an existing revolving credit facility. Pre-tax recapitalisation costs of US$17m will be booked in 2H09. Debt now falls to a manageable US$100m which implies gearing (net debt/equity) of around 10-15%. All terms and conditions of the existing facilities remain unchanged including pricing and covenants, which we have discussed in our prior notes. Existing facilities mature in April 2012, which means focus now turns towards improving earnings. The business is highly leveraged to the overall commodities cycle through its drilling services and product manufacturing divisions. It has high fixed costs and saw an unprecedented decline in volumes over the past year. The high level of operating leverage produced a boom-to-bust situation very quickly from 2H08 to 1H09. BLYs heavily geared balance sheet was the primary source of such large losses by shareholders. Luckily, the brand and overall quality of the business wasnt impacted by asset sales or customer issues. Any recovery in global markets should see BLY emerge in a competitive position with a lower cost base after global cost-cutting measures earlier this year. Strong demand for drilling services and higher capacity utilisation in the product manufacturing divisions could see EBITDA margins lift above 20% compared to FY09 guidance of around 13%. We most likely saw the bottom of the cycle in 2H08/1H09 and now estimate FY09 and FY10 EBITDA of US$129m and $193m respectively. In FY11 we expect EBITDA of US$252m, driven by higher demand for services. US$ reported earnings are complicated by currency translation, with operations spread globally. A lower US$ inflates US$ reported earnings but lowers translated A$ earnings, on which we base our earnings estimates. Our post recapitalisation FY10 and FY11 A$ EPS numbers are revised higher to 2.5cps and 3.6cps respectively, assuming an average A$/US$0.85 exchange rate over the next few years. We increase our valuation to A$0.39, which reflects an FY11 PER of 11x. Our FY11 US$ earnings estimates are still well below the peak FY09 levels. The recent bounce in commodity prices bodes well for BLYs drilling services, with capital expenditure decisions by large clients to be determined shortly as new budgets are set for 2010. Our revised estimates assume capital expenditure budgets set over the next year will see higher demand for exploration-type projects, particularly in markets like gold where demand is strong. There could be some lag from FY10 into FY11, though this is largely reflected in our forward estimates. The product manufacturing division is key to any earnings recovery. Our recommendation is revised to a Buy below $0.29, where BLY trades on a revised FY11 PER of 8x. This is still a discount to industry peers, which rallied hard over the past six months. While we advised against participating in the recapitalisation program priced at $0.27, there have been opportunities to buy the stock below the offer price over the past few months. More importantly, commodity prices continued to strengthen since the capital raising and sentiment continues to improve across the industry. Despite our positive recommendation we continue to express caution, particularly for those with a low risk tolerance. BLYs high degree of operating leverage is only suitable for those with an above average risk tolerance and even then only as part of a very well diversified portfolio. The ability to successfully recapitalise the balance sheet sees our business risk rating revised from Speculative to High.
 
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Mkt cap ! $36.03M
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