Hughes Drilling Limited ("HDX")

[steve fleming]

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.

[steve fleming]

Are their drills different from other competitor drills? What's stopping Boart from deploying their idle rigs into the HDX market at cost, in order to guarantee other mining services work? Its going to get nasty out there, how are HDX positioned to see off the competition who will now do whatever it takes to get new contract work? That is what I would be asking management. Its not the same game as it was 6-12 months ago - just ask BHP or RIO CEOs.

Hi KW - if you are interested in this company, you should have a read one of their recent presentations.

There is only one other real competitor that offers coal blasting in the NSW/QLD coal blasting market (not Boart). There is actually a shortage of coal blasting drills.

HDX is currently winning significant market share (42% to 47% in 1H13) through competitor displacement.

The Reichdrill drills offer substantial maintenance and productivity advantages.

Per the presentation:

"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."

[Joshuatree]

Hi Night owls. I also see REICHDRILLS as a moat around the business strengthening it by giving full control and more cost savings .

[steve fleming]

http://www.proactiveinvestors.com.au...nal-40874.html

Hughes Drilling’s (ASX: HDX) A$18.5 million placement and acquisition of its rig provider Reichdrill Inc. for US$8.9 million are transformational for the company as it moves from being a pure growth stock to a growth and yield stock.

Chairman Robert Hackett told Proactive Investors the placement to existing shareholders and new institutional and sophisticated investors in Australia and overseas would turn the company’s balance sheet considerably more conservative.

This - together with the increase in operating cash flow - would enable the company to turn into both a growth and yield stock.

Beyond that, the placement of 57.8 million shares priced at A$0.32 each will also double the free float of the company’s shares and transform Hughes from what has essentially being a retail stock to one weighted more towards institutions.

It will also lift its market capitalisation from the sub $50 million level, which tends to fly under the radar of investors, up towards the $100 million level.

This would likely attract the active interest of more investors in the company.

“There would also be a positive perception shift arising from the Hughes family holding post capital raising diluted interest of 39% from the previous 58%,” Hackett added.

[percy]

steve,
thanks for that post.

[Joshuatree]

All Good . Its well worth listening to boardroom radio interview with HDX. Lotsa win/ win ticks with this transformational transaction plus other info like Reichdrills ramp up in demand coming from the USA too.

[trackers]

Thanks for the analysis Steve as always... picked up some today

[Joshuatree]

GREAT to see an Fund K2 Asset Man, now a holder of 7.2% of HDX shares today. $5000 of shares @ 32c offered to shareholders on register 14th march sent out re 19th on.

[steve fleming]

Hughes Drilling [HDX: AU], a listed Australian specialist drilling company, could look to divest its delineation drilling business in the future as it focuses on its blast hole drilling unit for the coal mining sector, said chairman Robert Hackett.

The Yatala, Queensland-based company has previously flagged that it considers its delineation drilling business non-core, Hackett said. It represents less than 10% of Hughes’ revenue and would be worth less than AUD 10m in the event of a sale, he added. The business provides delineation and geological drilling services from pre-feasibility site mapping to mine expansions. Should Hughes decide to sell the business, this would involve the sale of its 14 rigs and related contracts, he noted.

Hackett said that the company would be targeting FY14 to FY17 earnings growth driven by the demand for its blast hole drilling services, as coal mines are ramping up production for existing projects. Hughes also has a five-year objective to grow its Express Hydraulics unit to contribute 25% of revenue and profits. Express Hydraulics sells and distributes drilling consumables and spares.

Last week (March 15) Hughes acquired US-based Reichdrill, a supplier of blast hole production rigs, for AUD 8.69m (USD 9m). At the same time it raised AUD 18.5m via a private placement to existing shareholders as well as new institutional and sophisticated investors. Funds raised would also go towards acquiring new production rigs. Baillieu Holst acted as lead manager to the placement.

By bringing on board more institutional shareholders as part of the equity raising, Hughes was trying to transform its ownership structure to improve liquidity in its stock, Hackett said. Prior to the placement, Hughes’ founder Bob Hughes held 58% but this has now been diluted to 39%.

Hackett added that Hughes is aiming to be able to pay dividends in the future. In the next 12 months, Hughes will focus on integrating Reichdrill and expanding its distribution arrangements in other regions. It is also looking to organically grow its production drilling and Express Hydraulics business.
Hughes Drilling currently has a market cap of AUD 43m (USD 44.6m).

------------------------------------------------------------------------------------------


Share price continues to weaken towards the placement price, but Management continue to publicly forecast short/medium term growth “FY14 to FY17 earnings growth driven by the demand for its blast hole drilling services, as coal mines are ramping up production for existing projects”….

market obviously currently do not believe the directors and all their talk of growth, which is probably fair enough, given the negative mining services backdrop at the moment.....so pressure is on to deliver (which to be fair, they have to date)

DTQ, another microcap driller, was all over the place today on announcement of a rights issue.

[Corporate]

I received my HDX SPP documentation in the mail on Friday. I will definitely be taking the full A$5k at 32c.