A 1.2% gain for the week is hardly anything to celebrate, but after all a gain is a gain and following on from a painful month investors would be pleased to eke out two weeks of gains. However the Aussie market will be hard pressed to make it three in a row after global stocks tumbled on Friday on the back of poor jobs data out of the US, with the Dow diving 2.2% to finish the week marginally lower. This is sure to put further pressure on Aussie stocks.

As we pointed out in the article ‘Are We Near The Market Bottom?’ on 6th August, finding the bottom is no easy task, in fact it is impossible to pick the bottom with any degree of accuracy. However we noted that one thing’s for sure – market declines rarely finish on days that see panic selling, such as Friday 5th August’s 4% walloping of the Australian market. This suggests that we are yet to see the low.

We wrote: ‘If we look back at recent crashes and subsequent bear markets, it is clear that panic selling usually signals that a lower low is in store, even if there are rallies along the way. The days on which previous bear markets registered their lows were nothing like the crash on Friday and the ultimate bear market low wasn’t found until much later.’ It seems that markets are still searching for that low, just how much lower it can go remains to be seen.

The market bottom aside, there are plenty of opportunities in the Aussie market after stocks have been hit hard across the board. And despite the weaker economic outlook, there are still many stocks that are set to grow over the coming months and years. Brokers remain bullish for miners and mining services stocks in particular, which together make up 55% of the week’s buys. 

In the table below of 29 buys from brokers Australia-wide you’ll see familiar blue chips such as Rio, Woodside, Woolworths and Lend Lease, as well as several small-caps including Hawkley Oil & Gas, Engenco, Texon Petroleum, Ampella Mining and Perilya. Perennial favourites Ausdrill and McMillan Shakespeare appear yet again. 

This week we focus on golden child Ausdrill, to see why it is so popular among brokers.

Ausdrill (ASL) – the golden child?

 Closing price  $3.34
 Weekly change  +$0.15
 % change  +4.7%

Broker Calls

Invesco Smaller Companies Funds – Buy
JP Morgan – Buy, price target $4.17
RBS – Buy
Lincoln Indicators – Buy
Patersons – Buy
Morningstar – Buy, price target $3.95

 

Chart: Share price over the year to 02/09/2011 versus ASX200 (XJO)

A favourite with brokers, Ausdrill (ASL) – as has been the case with many mining services stocks – has boomed over the past year, rising a whopping 75% over the past 12 months. Sure, the stock is down from its peak hit in April this year of $3.90, but the lineup of brokers with buys on the stock makes it worth another look. What’s more, it reported a 52% increase in net profit just last week, beating its guidance by 5%.

As the name suggests, ASL is a mining services company that provides drilling, blasting, equipment hire and logistic services. It makes its money primarily via contracts with gold miners, with 60% of revenue coming from gold companies including Kalgoorlie Consolidated Gold Mines, Perseus Mining, Adamus Resources, Gold Fields and BHP Billiton.

The company has achieved solid revenue growth over the past decade via organic growth and acquisitions, and has reported another stellar year with net profit up over 50%. In Bob Kohut’s column this week on mining services companies Ausdrill and Monadelphous he points out that Ausdrill has increased revenue every year over the past five years to more than double over that timeframe to more than 800 million dollars. What’s more, as bearish sentiment settles in, ASL is likely to still fare well given its exposure to the gold mining sector.

And after a strong showing in 2011 ASL is now targeting $1 billion in revenue this financial year and another big increase in earnings as it heads toward its eighth straight record profit. ‘The boost in revenue and profit is a result of the expansion of the group’s asset base through increased capital expenditure to meet growth in the industry,’ Managing Director Ron Sayers said. ‘The group has also benefited from the contribution from Brandrill, the drilling and blasting company it acquired in December 2009.’

Of course it was strong commodity prices, particularly the stellar gold price, that underpinned greater activity in the mining sector and helped ASL post such a strong rise in net profit. The 2012 $1 billion revenue target is sensitive to volatile world financial markets, a tight labour market and what happens to commodity prices, particularly the toppy-looking gold price.

Despite rocky markets brokers continue to be bullish on ASL. As reported last month on TheBull PREMIUM and in an article ‘Mining Services Stocks Leveraged to the Mining Boom’ in February on TheBull, brokers and funds have been jumping on board this mining services company in droves.

On May 17, Invesco became a 5% shareholder of Ausdrill. Its Smaller Companies Fund is overweight in a diverse pool of securities, led by mining services company Ausdrill Ltd (ASL). Shortly thereafter JP Morgan and RBS Australia both initiated coverage of Ausdrill with buy ratings. JP Morgan, which expects a recent equity raising to enable additional capital investment, has a price target of $4.17. Meanwhile RBS noted that 65% of the company’s revenues come from customers at the production stage, protecting ASL against price volatility.

‘Ausdrill’s business has experienced strong growth in recent years and, assuming continued strength in the resources sector, Ausdrill anticipates a high level of tender activity in the next 12 months,’ RBS said in April in anticipation of the equity raising. RBS forecasts 13-16% revenue growth across FY11-FY12; JP Morgan expects earnings per share to grow 20% in FY12.

James Samson, Lincoln Indicators also has a firm buy on the drilling and blast services supplier.  ‘We believe full-year 2012 earnings per share growth of 16 per cent or more is realistic given the expected return to profitability of some previously underperforming divisions,’ he says. ‘A full-year contribution from acquisition Connector Drilling and additional returns from new invested capital will assist the bottom line.’

Graeme Carson, Senior Industrial Analyst for Patersons, says that “the company is well and truly emerging as a dominant force in Australian and African contract mining services and the growth outlook is underpinned by the gold and iron ore-dominated order book.” Hamza Habib, Patersons Securities also has a BUY on ASL. ‘Management has increased earnings guidance and expects to provide the market with positive news flow regarding new contract wins moving forward,’ says Habib. ‘ASL’s African business exposure has been strengthened by its strategic alliance with Barminco, which is expected to grow the company’s revenue during the next two years.’

And based on Thomson Reuters data this is a favourite with brokers – 90% of analysts have a buy on ASL with a total of ten analysts covering the stock. Just one has an ‘underperform’.

All these bullish brokers could easily make your head spin with thoughts of making it rich by jumping on board the ASL gold train. However as with any up and coming stock in a mining boom, there are plenty of risks that could stop the train in its tracks. The biggest potential trap is of course the considerable sovereign risk faced in Africa, where ASL has significant exposure. On top of this, African contracts are in US dollars, with the high Aussie dollar taking its toll on earnings from Africa.

Additionally ASL is highly leveraged firstly to gold – via 60% of its contracts – and then to iron ore. Any sudden drop in prices of either of these commodities could cause its clients to delay or even abandon upcoming projects, which would not be good news for shareholders.

Stock code: ASL 

Charts: Ausdrill Limited

More news: Ausdrill Limited

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