Hughes Drilling Limited ("HDX")
New look HDX so good time to start a new thread on HDX
Today confirmed the purchase of Reichdrill, their major supplier/manufacturer of production drilling rigs (ie integrating upwards). Acquisition multiple pretty reasonable = 3 x CY13 EBITDA.
HDX now control the IP/brand name, and order book of a premium drill manufacturer with global reach - makes HDX a fully integrated manufacturer / distributor and operator, which makes it a pretty interesting investment proposition.
REichdrill is a 65 year old company with strong reputation.
HDX now provides it with the public company backing, and industry contacts, to aggressively expand sales of drill rigs into Asia and Africa. Also can use HdX's operating experience to refine and optimise the manufacturer of the drills...also diversifies revenue away from coal and Australia.
Also HDX benefits significantly from retention of cash margins on sales by ReichDrill to HDX.
(Ie FY12 – 10 units purchased @ $300k margin per unit = $3m CASH saved)
HDX growth to come from existing coal drill market in NSW/QLD
47% share of the QLD & NSW contracted production drilling market, demand continues to exceed availability of suitable equipment (production rising, competitor shrinkage).
Significant growth locked in: Significant expansion of contracted rig fleet during FY2013 and beyond
Plus + now able to also target growth from expanding the REICHdrill sales. (ReichDrill currently has the most external Drill Rig orders on hand that it has had for the last 4 years.)
Valuation looks Ok as well
Assume $3m EBITDA (from Reichdrill) + $22m EBITDA for HDX = $25m
Current EV for HDX = 0.36 x 180m + 28m debt = $93m
= less than 4 x EBITDA
Obviously, with a coal focused mining services company, with some debt, it is not without risk.
But Hughes Drillling has been around for 40 years and Reichdrill 60 years so they have obviously managed to survive many a mining cycle.
If these drills are as great as HdX say they are, to own the IP provides a new and genuine avenue for growth, as well as securing for HDX drills to service their own contracts.
Likely to be short term weakness though as the 32c placement is digested.
Will see how it plays out.