AUSTRALIA BLY AU Price (at 08:01, 12 Sep 2013 GMT) Neutral A$0.50 Valuation A$ 0.71 - DCF (WACC 10.1%, beta 1.5, ERP 0.1%, RFR 0.1%, TGR 0.0%) 12-month target A$ 0.56 12-month TSR % +12.0 Volatility Index Very High GICS sector Capital Goods Market cap A$m 231 30-day avg turnover A$m 3.6 Number shares on issue m 461.2 Investment fundamentals Year end 31 Dec 2012A 2013E 2014E 2015E Revenue m 2,011.5 1,268.4 1,193.5 1,240.6 EBIT m 193.4-24.6-18.4 29.2 Reported profit m 67.1-350.0-30.0 2.9 Adjusted profit m 113.2-80.9-30.0 2.9 Gross cashflow m 240.7 61.8 95.6 116.7 CFPS 52.2 13.6 21.0 25.7 CFPS growth % -11.0-73.9 54.6 22.1 PGCFPS x 0.9 3.4 2.2 1.8 PGCFPS rel x 0.09 0.33 0.24 0.21 EPS adj 24.6-17.8-6.6 0.6 EPS adj growth % -29.2 nmf 62.9 nmf PER adj x 1.9 nmf nmf 72.0 PER rel x 0.10 nmf nmf 5.17 Total DPS 7.4 0.0 0.0 0.6 Total div yield % 15.9 0.0 0.0 1.2 Franking % 18 nmf nmf 35 ROA % 9.2-1.3-1.2 2.0 ROE % 10.0-8.8-4.4 0.4 EV/EBITDA x 2.4-3.9 7.2 5.4 Net debt/equity % 45.1 73.9 61.5 48.8 P/BV x 0.2 0.3 0.3 0.3 BLY AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2013 (all figures in USD unless noted) 12 September 2013 Macquarie Securities (Australia) Limited Not out of the woods yet Event BLY has announced a $300m US debt offering ($260m secured, $40m unsecured notes due 2018). Proceeds will be used to pay down outstanding borrowings under BLY's revolving credit facility. Subject to the successful completion of the debt offering, terms of BLY's revolving credit facility will be amended including reducing the size of the facility from $450m to $150m, and eliminating the maximum leverage ratio covenant. Impact Still need to get debt offering away. At this stage the debt offering has only been announced, BLY still needs to successfully complete it. Absent this debt restructure, we have BLY breaching its debt covenants at 31 Dec with gross debt to EBITDA forecast to increase to 4.76x vs 4.75x covenant limit under BLY's existing revolver. If successful, it will remove the risk of an equity raising but at what cost? At a minimum we estimate BLY would pay 9.0% on its new US notes. This compares to its existing US unsecured notes at 7% and the current revolver at 250bp over LIBOR. We also note that amendments to the revolver, which is in place until July 2016, are accompanied by restrictions on BLY's ability to spend on capex and pay dividends. Net debt looks to remain uncomfortably high for at least another 12-18 months. We forecast $515m net debt at 31 Dec ($564m reported at 30 June), falling to $410m by end FY14E (4.50x gross debt:ebitda). Earnings risk remains. Global peers Major Drilling and Layne Christensen reported results this week with revenues falling 54% and 41%, respectively (quarters ended 31 July). This compares to BLY's 35% fall in 1H13 revenue and our FY13E forecast for revenue -37% to $1.27bn (consensus -39% to $1.22bn). In our view, there is further risk to earnings for BLY with both Major and Layne expecting conditions to remain challenging for the balance of the year. At its recent result BLY downgraded earnings expectations for the fourth time in 12 months. BLY expects FY13E EBITDA to come in at the low end of $116-159m consensus range. Our $118m FY13 EBITDA forecast is in line with this, and implies $38m in the 2H (53% fall in sequential earnings), below prior trough earnings of $51m in 1H09. Earnings and target price revision No change. Price catalyst 12-month price target: A$0.56 based on a EV/EBITDA methodology. Catalyst: Successful completion of US debt offering. Action and recommendation If successful, the debt offering and amendments to the revolver will remove risk of an equity raising, which has been weighing on the stock. However balance sheet metrics are likely to remain uncomfortably high for the next 12-18 months and there is still risk around earnings with further price deterioration to come through. Neutral, $0.56 TP. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
Fig 1 Absent successful completion of the debt offering BLY will breach its debt covenants by Dec-13 $m 2010 2011a 2012a May-13a 1H13a Aug-13 2013e 1H14e 2014e Net debt 154 231 512 585 564 545 515 472 410 ND:ND+E 13% 17% 31% 34% 44% 43% 43% 41% 38% Net debt : EBITDA 0.69 0.65 1.59 1.82 2.90 2.80 4.36 5.90 3.82 Gross debt : EBITDA 1.12 0.88 1.87 2.10 3.07 2.98 4.76 6.65 4.50 Interest cover (EBITDA) 42.96 18.93 11.96 5.11 3.81 2.81 3.57 1H13 net debt of $562m was down only $21m from peak of $585m in May, and above our $546m forecast. Net debt reduced further in August to $545m At 30 June BLY s borrowings consisted of US$300m senior unsecured notes maturing April 2021, and $305m drawn under a revolving bank loan ($450m facility limit) with $25m repayments due in each of June 2014, August 2014, June 2015, August 2015. The remaining $350m is due in July 2016. The leverage ratio limit for BLY s revolving bank loan was increased in July from 3.50x gross debt to EBITDA to 4.00x for the period to 30 June 2013, and 4.75x for the periods to 31 December 2013 and 30 June 2014. The ratio will be reduced to 4.00x from Dec 2014, and back to 3.50x from Dec 2015. Balance sheet metrics are uncomfortably tight with 1H13 gross debt:ebitda at 3.07x on our numbers and forecast to increase to 4.76x at Dec-13. This would put BLY in breach of its leverage covenant of 4.75x. Interest cover of 5.11x in 1H13 and 3.81x FY13e remain above the 3.0x covenant minimum, although we forecast a breach in 1H14 with interest cover falling to 2.81x EBITDA. Subject to the successful completion of the $300m debt offering, terms of BLY's revolving credit facility will be amended including reducing the size of the facility from $450m to $150m, eliminating the maximum leverage ratio covenant, adjusting the interest coverage ratio covenant, and adding covenants requiring maintenance of at least $30m in liquidity. There will also be restrictions around capex and dividends. Fig 2 Further pain to come with pricing pressure to impact the 2H FY11a 1H12a % ch 2H12a % ch FY12a % ch 1H13a % ch 2H13e % ch FY13e %ch FY14e % ch Revenue Drilling Services 1,447.9 816.7 20% 699.5-9% 1,516.2 5% 537.6-34% 414.3-41% 951.9-37% 904.6-5% Drilling Products 572.4 282.1 2% 213.2-28% 495.3-13% 181.2-36% 135.3-37% 316.5-36% 288.8-9% Total revenue 2,020.3 1,098.8 15% 912.7-14% 2,011.5 0% 718.9-35% 549.6-40% 1,268.4-37% 1,193.5-6% EBITDA Drilling Services 296.0 177.0 37% 112.6-33% 289.6-2% 84.2-52% 56.7-50% 140.9-51% 130.3-8% Margin 20.4% 21.7% 16.1% 19.1% 15.7% 13.7% 14.8% 14.4% Drilling Products 132.5 68.3 1% 38.9-40% 107.2-19% 22.4-67% 14.9-62% 37.4-65% 34.9-6% Margin 23.2% 24.2% 18.3% 21.7% 12.4% 11.0% 11.8% 12.1% Other -72.2-37.6 19% -37.4-8% -75.0 4% -26.2-30% -33.8-10% -60.0-20% -57.9-4% Total EBITDA 356.3 207.7 26% 114.2-40% 321.9-10% 80.4-61% 37.8-67% 118.2-63% 107.3-9% EBITDA margin 17.6% 18.9% 12.5% 16.0% 11.2% 6.9% 9.3% 9.0% Total D&A -110.6-59.7 14% -67.8 16% -127.4 15% -71.5 20% -71.3 5% -142.8 12% -125.7-12% EBIT Drilling Services 212.5 132.1 48% 54.8-55% 187.0-12% 29.8-77% -3.2-106% 26.7-86% 29.7 12% Margin 14.7% 16.2% 7.8% 12.3% 5.5% -0.8% 2.8% 3.3% Drilling Products 119.8 61.8 0% 31.4-46% 93.2-22% 14.6-76% 7.1-77% 21.6-77% 21.1-2% Margin 20.9% 21.9% 14.7% 18.8% 8.0% 5.2% 6.8% 7.3% Other -86.6-45.9 19% -39.8-17% -85.7-1% -35.5-23% -37.4-6% -72.9-15% -69.2-5% Total EBIT 245.7 148.0 31% 46.4-65% 194.4-21% 8.9-94% -33.5-172% -24.6-113% -18.4-25% EBIT margin 12.2% 13.5% 5.1% 9.7% 1.2% -6.1% -1.9% -1.5% Net interest -18.8-12.3 77% -14.6 23% -26.9 43% -15.7 28% -15.3 4% -31.0 15% -30.1-3% Pre tax profit 226.8 135.8 28% 31.8-74% 167.5-26% -6.8-105% -48.8-254% -55.6-133% -48.4-13% Tax Expense -66.9-38.0 20% -15.2-57% -53.2-20% -53.6 41% 28.2-285% -25.3-52% 18.4-173% Adjusted NPAT 159.9 97.7 32% 16.5-81% 114.3-29% -60.4-162% -20.6-224% -80.9-171% -66.9-17% Significant items 0.0-46.1-46.1-269.0 0.0-269.0 Reported NPAT 159.9 97.7 32% -29.6-134% 68.2-57% -329.4-437% -20.6-30% -350.0-613% -66.9-81% A$:US$ $1.035 $1.027 $1.033 $1.030 $0.998 $0.905 $0.951 $0.880 CAD:US$ $1.014 $0.993 $1.010 $1.002 $0.987 $0.950 $0.968 $0.913 12 September 2013 2
1H13 EBITDA of $80m was below our $87m forecast due to weaker than expected margins. BLY s group EBITDA margin of 11.2% compared to our 12.6% and was down 130bp on a sequential basis. This is only 20bp above the GFC low of 11.0% in 1H09. Drilling Services EBITDA of $84m just missed our $86m forecast. Adjusted EBITDA margin of 15.7% was down 40bp on 2H12 s 16.1% and is 200bp below the GFC trough of 17.6% in 2H10. Drilling Products EBITDA of $22m was well below our $33m forecast. Margin of 12.4% was a 590bp decline vs 2H12 reflecting the high fixed cost base of the business. Current FY13 guidance is for EBITDA at the low end of the $116-159m analyst consensus range that pre 1H13 result. Our $118m FY13E EBITDA forecast is in line with this, and implies $38m in the 2H, a 53% fall in sequential earnings. We forecast a 37% fall in FY13 Drilling Services revenue to $952m, reflecting an average utilisation rate of 52% and 10% average price declines. Our $141m EBITDA forecast implies $57m in the 2H, which is below the trough of $71m in 1H09 and 2H09. We expect 2H margins will weaken further as pricing pressure intensifies, more than offsetting cost cutting benefits. We forecast a 36% fall in Drilling Products revenue in FY13E and EBITDA down 65% to $37m. 11.0% margin is down on 1H13, but remains above the trough of 9.8% in 1H09. Earnings risk remains. Major Drilling reported a 54% fall in Q1 revenue this week, while Layne Christensen's Mineral Exploration business saw revenue decline 41% (quarters ended 31 July). This compares to BLY's 35% fall in 1H13 revenue and our FY13 forecast for revenue -37% to $1.27bn (consensus -39% to $1.22bn). In our view there is further risk to earnings for BLY with both Major and Layne expecting conditions to remain challenging for the balance of the year. In FY14E we forecast a 6% fall in revenue reflecting 2H13 run rate. We expect some modest margin improvement (group EBITDA margin+210bp from 2H13 low) as benefit of $90m additional cost savings flows through. Our $107m FY14e EBITDA forecast is -9% on FY13E and below the trough of $111m in FY09. 12 September 2013 3
Limited (BLY) 26-Aug-13 Interim results US$ 1H12A 2H12A 1H13A 2H13E Profit & Loss US$ 2012A 2013E 2014E 2015E Revenue 1098.8 912.7 718.9 549.6 Revenue $m 2011.5 1268.4 1193.5 1240.6 15% -14% -35% -40% growth 0% -37% -6% 4% EBITDA $m 207.7 114.2 80.4 37.8 EBITDA $m 321.9 118.2 107.3 142.9 Depreciation $m 51.4 59.6 61.7 61.6 Depreciation $m 111.0 123.4 106.2 94.3 Amortisation $m 8.3 8.2 9.7 9.7 Amortisation $m 16.5 19.4 19.4 19.4 EBIT $m 148.0 46.4 8.9-33.5 EBIT $m 194.4-24.6-18.4 29.2 Net Interest expense $m 12.3 14.6 15.7 15.3 Net interest expense $m 26.9 31.0 30.1 24.8 Pre-Tax Profit $m 135.8 31.8-6.8-48.8 Pre-Tax Profit $m 167.5-55.6-48.4 4.3 Tax Expense $m 38.0 15.2 53.6-28.2 Tax Expense $m 53.2 25.3-18.4 1.4 Net Profit $m 97.7 16.5-60.4-20.6 Net Profit $m 114.3-80.9-30.0 2.9 Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0 Net Abn/Extra $m 0.0-46.1-269.0 0.0 Net Abnormals/Extra. $m -46.1-269.0 0.0 0.0 Reported Earnings $m 97.7-29.6-329.4-20.6 Reported Earnings $m 68.2-350.0-30.0 2.9 Adjusted Earnings $m 97.7 16.5-60.4-20.6 Adjusted Earnings $m 114.3-80.9-30.0 2.9 Gross Cashflow $m 170.5 58.8 34.9-31.0 Gross Cashflow $m 229.2 3.8 118.1 126.4 EPS (Adj/dil) c 21.4 3.6-13.3-4.5 EPS (adj/diluted) c 25.1-17.8-6.6 0.6 EPS growth % 32% -81% -162% -224% EPS growth % -28% -171% -63% -110% CFPS c 37.4 12.9 7.7-6.8 PE (adj) x 1.9 nmf nmf 71.9 CFPS Growth % 14% -63% -79% -153% CFPS c 50.4 0.8 26.0 27.8 EBITDA/Sales % 18.9% 12.5% 11.2% 6.9% CFPS Growth % -26% -98% 2973% 7% EBIT/Sales % 13.5% 5.1% 1.2% -6.1% PGCFPS x 0.9 55.0 1.8 1.7 Earnings Split % 86% 14% nmf nmf DPS c 7.4 0.0 0.0 0.6 Revenue Growth % 15% -14% -35% -40% Yield % 15.9% 0.0% 0.0% 1.2% EBIT Growth % 31% -65% -94% -172% Franking % 35.0 - - 35.0 Profit and Loss ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E Revenue Growth % 0% -37% -6% 4% EBIT Growth % 10% -113% -25% -259% Pre-tax Profit $m 167.5-55.6-48.4 4.3 EBITDA/Sales % 16.0% 9.3% 9.0% 11.5% Depreciation & Amortisation $m 127.4 142.8 125.7 113.8 EBIT/Sales % 9.7% -1.9% -1.5% 2.4% Tax Paid $m -65.7-83.3 40.9 8.3 Effective tax rate % 32% -46% 38% 32% Gross cashflow $m 229.2 3.8 118.1 126.4 Payout ratio % 29% 0% 0% 85% Changes in working capital $m -105.4 95.2 38.8 21.1 EV/EBIT x 3.7-29.6-33.8 18.5 Other $m -59.6-79.0 0.0 0.0 EV/EBITDA x 2.2 6.1 5.8 3.8 Operating Cashflow $m 64.2 20.1 156.9 147.5 EV/Sales x 0.4 0.6 0.5 0.4 Acquisitions $m 0.0 0.0 0.0 0.0 Capex - Plant & Equip. $m -282.8-48.1-51.8-64.6 Balance sheet ratios Asset Sales $m 3.3 12.2 0.0 0.0 ROE % 10% -9% -4% 0% Other $m 0.0 26.0 0.0 0.0 ROA % 9% -1% -1% 2% Investing cashflow $m -279.5-9.9-51.8-64.6 ROFE % 13% -2% -2% 3% Dividend (ordinary) $m -55.3-4.6 0.0 0.0 Net Debt $m 512.3 515.1 410.0 327.1 Equity raised $m -9.2 0.0 0.0 0.0 Net Debt/Equity % 0.5 0.7 0.6 0.5 Other $m 0.0 0.0 0.0 0.0 Interest Cover (EBIT/NI) x 7.2-0.8-0.6 1.2 Financing cashflow $m 223.6-44.6-80.0-80.0 Price/NTA x 0.3 0.4 0.4 0.4 NTA per share $ 1.58 1.08 1.04 1.06 Net Change in cash/debt $m -279.8 5.6 105.2 82.9 EFPOWA m 455.5 454.7 454.7 454.7 Historical performance 2009A 2010A 2011A 2012A Balance Sheet 2012A 2013E 2014E 2015E Cash $m 89.6 47.3 72.5 75.4 Revenue $m 978.2 1475.9 2020.3 2011.5 Receivables $m 260.5 228.3 214.8 223.3 EBITDA $m 111.0 221.8 356.3 321.9 Inventories $m 533.7 370.4 334.2 302.7 Depreciation/Amortisation $m 88.5 93.4 110.6 127.4 Investments $m 0.0 0.0 0.0 0.0 EBIT $m 22.5 128.4 245.7 194.4 Property, plant & equipment $m 628.7 464.0 399.6 354.9 Net interest expense $m 45.1 5.2 18.8 26.9 Intangibles $m 418.9 203.8 194.4 190.0 Pre-Tax Profit $m -22.6 123.3 226.8 167.5 Other Assets $m 319.3 299.3 299.3 299.3 Tax Expense $m -7.7 38.8 66.9 53.2 Total Assets $m 2250.7 1613.2 1514.8 1445.5 Net Profit $m -14.9 84.5 159.9 114.3 Payables $m 284.3 183.9 173.1 171.2 Net Abn/Extra $m 0.0 0.0 0.0-46.1 Short Term Debt $m 0.2 0.2 0.2 0.2 Long Term Debt $m 601.7 562.3 482.3 402.3 EPS (adj/dil) c -0.7 18.5 35.0 25.1 Other Liabilities $m 229.1 170.0 192.5 202.2 EPS growth % -106% -290% 90% -28% Total Liabilities $m 1115.3 916.4 848.0 775.8 Ordinary DPS c 0.0 5.5 10.4 7.4 Shareholders Funds $m 1122.2 1128.0 1128.0 1128.0 EBITDA/Sales % 11.4% 15.0% 17.6% 16.0% Minority Interests $m 0.0 0.0 0.0 0.0 EBIT/Sales % 2.3% 8.7% 12.2% 9.7% Total Shareholders Equity $m 1135.4 696.8 666.7 669.7 ROE % -3% 8% 15% 10% ROFE % 2% 12% 19% 13% Total Funds employed $m 2,250.7 1,613.2 1,514.8 1,445.5 EFPOWA m 2259.1 458.0 456.6 455.5 Divisional Information 2012A 2013E 2014E 2015E Sales Drilling Services $m 1516.2 951.9 904.6 919.8 Drilling Products $m 495.3 316.5 288.8 320.8 Group sales $m 2011.5 1268.4 1193.5 1240.6 EBITDA Drilling Services $m 289.6 140.9 130.3 152.7 Drilling Products $m 107.2 37.4 34.9 51.3 Corporate/other $m -75.0-60.0-57.9-61.1 Group EBITDA $m 321.9 118.2 107.3 142.9 12 September 2013 4
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2013 AU/NZ Asia RSA USA CA EUR Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients) Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients) Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients) Company Specific Disclosures: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Risk Disclosure: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerrings by competitors.the results of operations may be materially affected by global economic conditions generally, including conditions in financial markets.the company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 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