Key points
1. Ausdrill released its full year results to 30 June, 2014 last week with a headline net profit after tax $29.1m, down 67.8% from FY13.
2. Despite the tough conditions the underlying profit, EBITDA and cash flow figures are reasonable with all showing positive contributions, albeit down on previous years.
3. Ausdrill USD bonds have rallied around $1.50 to be currently offered at an indicative yield to maturity of 7.94% (or a credit spread over USD swap rates of circa 614bps) demonstrating the high returns still on offer.
Ausdrill Limited (Ausdrill) released its full year results to 30 June 2014 last week.
The results were broadly in line with expectations given the company provided an update to the market just three weeks ago (see email below for further detail), with sizeable reductions in revenue and profitability measures but good progress in reducing net debt.
Ausdrill and its mining services peers have seen material reductions in activity and margins as a result of the slowdown in the mining industry. The company believes that it is at or near the bottom of the cycle but doesn’t anticipate a strong rebound in the market with tough conditions to persist until at least 2015. Given this backdrop, the focus is on deleveraging and cash generation with significant reductions in capex (particularly from low levels of equipment acquisitions) helping to offset lower revenue and profitability numbers.
Key figures from the result included:
- Sales Revenue down 26.8% to $826.3m due to “lower activity levels and challenging market conditions”
- Non-cash impairment charge of $73m after tax (in the middle of the $60m - $90m guidance provided on 6 August)
- NPAT (excluding non-cash impairment charge) down 67.8% to $29.1m
- EBITDA (excluding non-cash impairment charge) down 36.3% to $173.7m
- EBIT (excluding non-cash impairment charge) down 50.0% to $74.5m
- Operating Profit Before Tax (excluding non-cash impairment charge) down 68.5% to $34.4m
- Statutory loss after tax (including impairment charge) down 148.5% to a loss of $43.9m
- Final dividend of 2.0 cents per share (total of 4.5 cents of $25m for the year, down from $34.9m in FY13)
- Operating cashflow after interest and tax down $45.2m or 24% but still a very healthy $142.1m
- Capex down 62.5% from $172.6m to $64.7m. This is the main mechanism Ausdrill has to reduce gearing in a period of low revenue and profit and management has targeted capex for FY15 of just $50m - $60m and will continue to sell down idle equipment
- Total debt down $84.2m or 15.7% to $453.3m which is possible due to the solid operating cashflow and large reduction in capex (i.e. a combination of the two points above)
- Cash and cash equivalents down $16.1m but still a very high $62.7m
- Net debt down $68.1m, from $458.7m to $390.6m at 30 June 2014. However, if pre-paid borrowing expenses are excluded the figure comes in at $400.9m
- Gearing (Net Debt / Net Debt & Equity) of 34.8% at 30 June 2014
- Net Debt : EBITDA of 2.3x at 30 June 2014
- Net Interest Cover (EBITDA: Net Interest) of 4.3x at 30 June 2014
Despite the tough conditions, the underlying profit, EBITDA and cashflow figures are reasonable with all showing positive contributions, albeit down on previous years.
Summary
The FY14 results affirm our views written three weeks ago that the company is on a deleveraging path in a difficult environment. At that time we highlighted the statement: “The Board remains focussed on improving the Company’s performance and applying the free cash-flow generated to reduce debt, with the Company remaining on track with its previously stated strategy of de-leveraging the business over the next 12 months.” This is a positive statement for debtholders and demonstrates that the company is focused on deleveraging and not on growth.
In the results presentation yesterday, management again stated its strategy was to deleverage, improve underperforming businesses and rationalise business structures.
Revenue and growth conditions are weak in the mining services sector, however, Ausdrill has the ability to deleverage fairly quickly via a significant reduction in capex (i.e. stop buying new equipment) as shown in the FY14 figures above. This will be the focus over the coming 12 – 18 months to see the extent of cashflow generation and deleveraging that occurs while the company rides out the bottom of the mining cycle.
Post results it appears the Ausdrill USD bonds have rallied around $1.50 to be currently offered at an indicative yield to maturity of 7.94% (or a credit spread over USD swap rates of circa 614bps) demonstrating the high returns still on offer. Investors are reminded that the Ausdrill USD bonds (rated BB-/B1) are viewed as relatively high risk but come with a high return to compensate.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. The USD Ausdrill Finance Pty LTD bonds mentioned in this article are available to wholesale investors only.