AJ Lucas Group: Positive Momentum In Drilling Services
Edison | Sep 25, 2018 02:28AM ET
AJ Lucas Group's (AX:AJL) FY18 (to end June 2018) results highlighted a material increase in drilling service revenues (+70%) and margins (+635% EBITDA). Based on AJL’s current order book and leading indicators, management expects rig utilisation and mining sector drilling activity to be sustained in FY19 with robust margins after AJL’s exit from legacy contracts in the coal seam gas and water markets. Our updated valuation reflects expected engineering and construction sales proceeds of A$25m and an increased valuation for drilling services. The net result is an increase in our P50 valuation for AJL Lucas of A$0.93/share (from A$0.86/share).
Drilling services recovery
A reported step-change in drilling services profitability was well ahead of the prior year, with underlying FY18 EBITDA growing from a low base to A$19.7m (from FY17 A$2.7m). Higher rig utilisation and a shift away from low/negative margin contracts in the coal seam gas and water sectors were key drivers. We concur with management that current profitability appears to be sustainable in FY19 based on leading (exploration metres drilled) and lagging indicators (coal shipments) in the coal sector. Our drilling services valuation at 6x EBITDA (three-year average underlying drilling services EBITDA) increases to A$54m from A$34m previously.
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