Wednesday 24 February 2016 by Alen Golubovic Company updates

Barminco’s half year earnings increase by 10.6%

THIS CONTENT IS SUITABLE FOR WHOLESALE INVESTORS ONLY

Barminco has released its 1H16 results highlighted by a 10.6% increase in earnings before interest, tax, depreciation and amortization (EBITDA) on the prior corresponding period. The company has also reduced the bonds outstanding through a further buy back but financial leverage continues to remain very high

Barminco has released its half yearly results (1H16), EBITDA has increased 10.6% compared to 1H15 and EBITDA margins have remained steady. For the official company results click hereExternal link - opens in a new window.

Key points:

  • Revenue is up 11.1% to AUD263.5m, while EBITDA is up 10.6% to AUD51.2m. The EBITDA margin has remained relatively stable at 19.4% versus 19.5% in 1H15. EBITDA for the quarter is up 25.6% on the prior quarter
  • The increase in revenue is primarily due to two contracts (Nova Bollinger and Rosebery) which weren’t online in the prior period, offset by no revenue received from Mt Lyell
  • USD336m of bonds remain outstanding (69%) from the USD485m issued, due to of progressive bond buybacks. During October 2015, the company repurchased and cancelled a further USD24.7m in principal value of its bonds in a cash funded buyback. This was the first time the company used cash to buy back bonds as opposed to unwinding its cross currency swap
  • Operating cashflow was at AUD53.4m (versus AUD59.3m in the prior period). Negative free cashflow of AUD19.4m was used for the bond buyback (AUD29.1 funded out of cash) as well as AUD26.6m of capital expenditures through the acquisition of plant and equipment
  • The company’s debt remains fully hedged to currency movements under a cross currency swap arrangement, and therefore its leverage profile is not exposed to a weakening AUD
  • Liquidity remains solid, with cash on hand of AUD85.4m, a AUD50m undrawn revolving credit facility (RCF) plus $29m which is available through equipment financing lines. Internal modelling indicates that funds generated from operations will provide sufficient liquidity for the company to meet its working capital, capex and other cashflow requirements for the foreseeable future. The company has no plans at this stage to draw on the RCF
  • The effect of the bond buy back has resulted in an annual interest saving of AUD11.2m over the remaining term of the bonds. Cash interest including swap costs on the high yield bond are now down to AUD49.4m from AUD60.6m (or roughly about half of current full year EBITDA)

In the context of a very challenging environment in mining services, the Barminco result looks relatively solid versus other mining services companies such as Emeco. The company has been able to maintain its EBITDA margin despite tough market conditions and has stated it can deliver a comparatively solid result for the full year.

Although leverage remains very high (debt / EBITDA ~ 4.5x, EBITDA/Interest ~ 2.0x), the combination of the bond buy backs and improved performance has resulted in a modest improvement in credit metrics. Liquidity remains relatively solid with cash of AUD85.4m on hand which gives the company a buffer for meeting its capital expenditure and interest servicing requirements.

The company has indicated that it does not need to draw on the RCF for liquidity and can meet its working capital and other requirements from funds generated from operations. Further improvements in Barminco’s earnings profile would enable future bond buy backs and further debt reduction would be needed to stabilise the credit profile.

The Barminco USD bond maturing in June 2018 is currently offered at an indicative yield to maturity in the ‘high teens’ and continues to represent a very high risk / return offering. We note the sector exposure to mining services and very high leverage are key risks with the credit. The bond is rated B- with a stable outlook from S&P, and B2 with a negative outlook from Moody’s.

Please contact your FIIG representative for further information and current pricing levels on the Barminco bond. Available to wholesale investors only.

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