Brandrill trading near three year lows and profitable

Wednesday, November 19, 2008 by Andrew McCrea

The Strange exploration drilling business, acquired in September 2008, performed well above budget in terms of rig availability and rig utilisation and consequentially in financial performance. The DT-Hi Load patented lightweight haul truck tray business, acquired in October 2008,is taking longer than anticipated to secure new sales. However, Brandrill remains confident in its medium to longer term potential.

During 2007-08 Brandrill drilling activities contributed $154 million in gross revenues, up 25% on 2006-07.

Approximately 50% of the growth was from the drill and blast business, and 50% from the new exploration activities. Brandrill recorded strong growth in blast contracting and civil drilling which enabled margins to increase by 20%.

Revenue growth was approximately one third from the organic growth of the drill and blast activities, one third from the new exploration activities and one third from the investment in DT Hi-Load.

Placement reduces debt levels

In early August Brandrill placed 45 million shares with Resource Capital Fund to raise $11.25 million of equity at $0.25, bringing to 425 million the total shares on issue. On a pro forma basis, these funds would have reduced the net debt to equity ratio to 62% as at 30 June 2008 and shown a healthy working capital surplus.

Outlook

FY09 Plan was for 30% revenue and profit growth with further upside
Capital committed $25m
Earning estimate. Downside case for FY09 now looks like earnings flat with FY08 and upside case of 30% earnings growth
DT Hi-Load starting to sell but outlook for second half is unclear.

Total drilling revenues are expected to exceed $200 million in 2008-09, up 30% on the prior year.

Positives of economic downturn

Strong cash generation quickly reduces debt
– Reduced wage pressure
– Reduced labour turnover – lower costs, higher productivity
– Best rigs applied to jobs

Comment by Andrew McCrea

Net cashflows from operating activities were very strong in 2008, a hallmark of BDL even in the pre-restructuring days. While interest costs doubled in 2008, the recent placement should see debt levels and interest expense reduce to manageable levels. Resource Capital Funds spent $11.2 m in the placement at 25 cents and this augurs well for BDL as a major shareholder.

Brandrill is a well managed company and since restructuring, the MD Ken Perry had been able to achieve a significant turnaround in earnings growth (and capital gains) for shareholders until the recent credit crunch. There is likely continuing uncertainty as to the effects of the slowdown in iron ore activity which is a key market for BDL. This is likely to see some restraint in the share price and slippage in the short term. However, cash generation is strong and cost base is likely to come down.

For long term shareholders, current market valuation of Brandrill equates to only a 30% premium to 2005 valuation levels when Brandrill was restructuring from a previous management that lost its way and BDL was barely making a pre-tax profit. Now BDL is generating $20m in net operating cash flow. We would look ahead post 2010 and believe that BDL has a worth closer to 25 cents than to current price.

Fast Facts

Brandrill Ltd
ASX:BDL
Issued Shares: 425.41
Market Cap: $34.0M
52-Wk High: $0.39
52-Wk Low: $0.08
Dividend: nil
Avg Volume: 550,00
2007/08:
EBITDA $34.7 (+67%)
EBITA $18.4(+82%)
NPAT $11.0 (+32%)
EPS: 0.03
P/E: 2.73

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