SWK’s 1H18 results were in-line with our forecasts and importantly showed margin improvement from FY17 lows. Guidance for full-year FY18 EBITDA for the drilling business of $17.5-19.5m on $135-145m revenue implies further margin expansion on the back of multiple exited underperforming contracts. Focus on working with clients who show a willingness to work with SWK on reaching agreeable terms of contract renewals should provide the potential for SWK to generate more appropriate returns on capital. We maintain our view that SWK’s current EV is largely supported by its core drilling business, with investors essentially buying an option on Orexplore at current prices. Buy maintained on a $0.40 valuation.
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