Ausdrill has released its FY16 result, with revenues up by 3.3% to $743.9m. The integrated mining and energy services group achieved a significant turnaround in earnings, delivering a profit from continuing operations of $20.2m (up 112.8%). Its reported net profit after tax of $58.2m includes $35.7m profit from the sale of non core businesses
Analysis of the bond
Continued improvement in the company’s credit profile, and a healthy cash position of $181.9m – up from $77.9m at FY15 – could provide a catalyst for the company to call some of its 2019 bonds early with the next step down in call price at 1 November 2016 to USD103.438.
The bonds are currently indicatively pricing slightly above par at USD100.25 which translates a yield to worst of around 6.74%* (based on a call in November 2018 at a price of USD100). With the company’s healthy cash balance and continued price appreciation on the bonds, we believe that a partial call at the 1 November 2016 call date could be a possibility.
The bond price history is below, showing previous high volatility linked to the downturn in commodities, as well as a recovery linked to the improvement in gold prices and outlook for the company’s credit profile. If you believe that the company is poised for further improved performance and the possibility of an early call, which would increase the holding period returns, then the bonds could present a good opportunity for relatively high yielding exposure to gold.
Source: FIIG Securities
Forward guidance
Approximately 84% of Ausdrill’s revenues are linked the gold mining services, and in a supportive gold price environment financial performance is expected to continue to improve with the company guiding a further 50% increase to profit in FY17 from continuing operations.
In addition to the strong FY16 result, Ausdrill is targeting $800m revenue in FY17 with an anticipated profit uplift of 50% on continuing operations. In recent years, mining services companies have been reluctant to provide earnings guidance given the uncertainty in commodities, so in our opinion, a management willing to provide guidance highlights increasing confidence from the business.
Ausdrill results summary
Source: Ausdrill
Strong net free cashflow generation of $104.1m was up about nine times from $12.5m in FY15, and helped deliver a solid improvement in the company’s balance sheet and credit metrics. Please note that this free cashflow includes a one-off $49.4m from the proceeds of the sale of non-core businesses. Despite this strong improvement, Ausdrill did not pay a dividend in FY16 which is positive for bondholders. The company’s continued focus on debt reduction has resulted in $143.1m of net debt repayments over the last two years.
As a result of the slowdown in the mining industry, Ausdrill’s strategy has been to keep capital expenditure to a minimum. Capital expenditure totalled $12.4m for the period, down from $28.5m from FY15, having been minimised through improving availability rates and the utilisation of idle capacity. As a result, capex at $12.4m has been lower than the level of depreciation at $68.0m.
Cash reserves of $181.9m were up 233% from $77.9m. This resulted in a lower gearing ratio of 26.3% versus 39.1% FY15, and a significant improvement in the net debt / EBITDA ratio from 3.2 times in FY15 to 1.7 times. The figure below summarises Ausdrill’s improved cash and net debt position, with 99.1% of debt outstanding relating to the 2019 US dollar bond. The group has a $125m revolving cash advance facility available of which $123.9m was undrawn at EOFY16 providing good liquidity in addition to the $181.4m cash balance.
Group debt position and maturity profile
Source: Ausdrill
While some mining services businesses struggled in FY16, Ausdrill’s strong performance has been underpinned by its long standing exposure to gold sector, providing a foundation for its revenue base with ~84% of mining services revenues generated from gold companies.
Following the FY16 announcement, Ausdrill announced that its African joint venture, African Mining Services (AMS), was appointed as preferred contractor by Toro Gold to provide a full suite of open pit mining services at the Mako project located in Senegal, West Africa. The contract is expected to generate approximately $300m in revenue over a term of 75 months, in addition to the FY17 guided revenue of ~$800m, with mining expected to commence in January 2017. The company expects an additional $25m capex is needed to service the contract.
A chart of the last five years of historical results is set out below. While conditions in the mining services sector remain challenging, it appears that Ausdrill’s FY15 performance could signal a ‘bottoming out’ of its earnings with signs of a cyclical recovery emerging through improved FY16 performance.
Source: Ausdrill
The Ausdrill US dollar bond maturing in November 2019 is currently offered at an indicative yield to worst of about 6.74%*, which is based on the yield to the June 2018 call date at a USD100 call price. However, please note supply is currently limited and we may see yields tightening off the back of the strong FY16 result and improved FY17 guidance.
We see Ausdrill’s performance continuing to improve while gold prices continue to remain supportive. However, with a high exposure to gold comprising 84% of revenues, Ausdrill’s earnings would be highly sensitive to any material downturn in the gold price.
A link to the results announcement is available here.
Note: Pricing indicative only and accurate as of 30 August 2016.
Please contact your FIIG representative for further information on the Ausdrill USD bond. Available to wholesale investors at a minimum face value of USD200,000.