The $8m acquisition of SA-based Security Alarm Monitoring Service (SAMS) adds 55% more connections, diversifies and boosts revenue, increases capacity across the group, and provides organic growth opportunities to leverage infrastructure. Our forecasts are upgraded on an assumption SAMS adds to group margin and, given debt funding, delivers earning accretion. Upgrade to Spec Buy (prior Hold) on a $0.225 valuation (prior $0.170).
Kidman Resources (KDR) released an updated Mineral Resource for the Earl Grey lithium deposit in Western Australia with 189Mt @ 1.5% Li2O for 2,843kt contained Li2O or 7Mt lithium carbonate equivalent (LCE). This represents a 54% increase in LCE and positions Earl Grey to the second largest hard rock lithium deposit globally. The greater Mt Holland project is World Class based on its large scale, wide mineralisation, low strip ratio, further exploration potential and low risk jurisdiction. KDR will have strong newsflow through 2018 with feasibility studies on the spodumene concentrator and lithium carbonate/hydroxide refinery in Q3 and Q4 respectively, as well as potential offtake agreements. The Company is focussing on ex-China markets which we see a valuable differentiator to its peer group of ASX listed hard rock lithium plays. SPEC BUY maintained with a revised target price of $2.50 (from $1.90).
Paringa Resources (PNL) released a construction update of its Poplar Grove thermal coal mine citing minor delays from a significant flooding event. The site was impacted by the worst flooding in the Western Kentucky region in 20 years. The impact will likely push production back four weeks from late-August to September/October 2018. Importantly, the sites levy system mitigated any major impact to installed infrastructure or the mine box cut. PNL is trading at a deep discount to Argonaut’s $1.50/sh target price, and despite delays, it is just six months from first production. Recently announced US tariffs and declining US coal inventories should buoy domestic coal demand and prices. BUY maintained.
Northern Star Resources (NST) has announced it’s agreed to acquire the South Kalgoorlie Operations (SKO) from Westgold (ASX: WGX). This is a value accretive deal which lifts the constraint on processing that has until now capped production in the Kalgoorlie assets. The acquisition comprises the 1.2Mtpa SKO processing plant and associated resources (4Moz) and reserves (250koz) within the tenement package. Under the agreement NST will pay WGX a consideration of $80m comprising 9.5m NST shares at A$6.30ps for $60m and a further $20m in cash. Settlement of the deal is expected on 1 April 2018. NST has flagged production growth in the 100% owned Kundana assets and we see the increased output being re-directed into the South Kal plant. We see strong potential for NST to lift group production by >100kozpa in FY19. Despite the positives the stock continues to trade ahead of our valuation and this transaction back fills value. We maintain our HOLD recommendation and revise our target price upwards to $6.12ps (from $5.70ps).
The 1H18 performance (revenue $5.9m, net loss from continuing op $2.3m) was weak as expected, although the focus from now on UAVs gives us cause to be optimistic about a 2H recovery. Forecasting risk sees us pare back margins in future periods, dropping our valuation to $0.60 (prior $0.75), but still backs up a speculative buy call. We will be ceasing coverage of OEC following release of this note after a review of companies covered.
We will be ceasing coverage of OEC immediately following release of this note.
A pull back in MCE’s share price nearer to our $0.47 DCF valuation gives us cause to upgrade to a HOLD (prior SELL). We note that significant forecasting risk remains as the Company is in the infancy of its diversification away from the weak riser buoyancy market. However, we are encouraged by early success in penetrating new markets with LGS, growing SURF’s revenue contributions and securing work in civil & infrastructure, where the opportunity in bulk freight is particularly appealing.
CLX has transformed itself from a largely WA-based business to a national logistics and transport provider. After the acquisition of Jayde in the last half, CLX expects to generate ~40% of its revenue from the eastern states. From this platform we expect last half’s adjusted EBITDA of $9.5m (slightly below our $9.9m forecast) to improve over time as the WA economy picks up steam and national organic and acquisitive opportunities emerge. Our valuation drops slightly to $1.50 (prior $1.60) on amendments to forecasts, but is still well ahead of the current share price. We see value and maintain our buy call.
While DCG’s 1H18 revenue of $141m and EBITDA of $1.3m did little to excite, the outlook commentary made for good reading. Work in hand and a large pipeline supports a much stronger performance in 2H18 and FY19. A combination of growing revenue and cost control should prove positive for margin in coming periods. We maintain a buy call on the compelling macro environment and an unchanged valuation of $1.40.
EBIT of $29m in 1H18 was as expected, and similar to the prior two halves. We expect a similar result in the current half. However, our focus is on FY19 and beyond. Revenue consistency and steady 6-8% shipbuilding margins in the US, combined with an expected uplift as commercial work drives greater workloads through the Australian and Philippines shipyards, should see strong growth next financial year. With medium term performance largely underpinned by a $3.4b order book and large longer-term opportunities, we remain positively disposed. Buy maintained on a $2.10 blended valuation.
Gold prices have risen by 10% in AUD terms and 7% in USD terms in FY18YTD. Funds flow has been predominantly into grass roots explorers evident in the surge of the ASX Small Resources (XSR) index which has risen by 36% FY18 YTD vs the ASX Gold Index (XGD) up just +14% FY18YTD. Equity valuations of the mid-tier producers continue to look stretched and we struggle to identify significant value. Emerging developers have recorded only incremental gains which presents an opportunity for investors looking for companies that screen cheaply with short timelines to production. Our key picks include Regis Resources (RRL) in the producers and Dacian Gold (DCN), Gascoyne Resources (GCY), Gold Road (GOR) and West African Resources (WAF) in the emerging developers. We also identify the next tier of potential development plays including Explaurum (EXU), Genesis Minerals (GMD) and Alice Queen Ltd (AQX) who look to make the transition into production. Catalyst Metals (CYL) is also attractive with a belt scale play in proximity to Kirkland Lake (KLA) Fosterville operations.
