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An upbeat outlook gives us more reasons to like IMDEX

03072020_IMD

An upbeat outlook gives us more reasons to like IMDEX

IMDEX (ASX:IMD) remains one of our preferred mining services exposures, as the company is well placed to benefit from the strong gold price outlook and is armed with a new product pipeline full of promise. The mining technology company recently provided an upbeat presentation highlighting a faster than expected demand recovery, encouraging results from new tool trials, accelerating adoption of cloud-connected products attributable to the pandemic, and robust medium-term industry fundamentals.

Here are the key points:

  • 4QFY20 revenue and earnings were impacted by various government mandated restrictions aimed at flattening the COVID-19 infection curve, stabilising in late-April and showing a steady week on week improvement since;
  • As at 19 June, instruments on rent had recovered to within 14 per cent of the pre-COVID peak and Management expect continued positive momentum over July and August. Fleet mix is also improving with higher margin, hub-connected ‘gyros’ growing as a percentage of tools on hire;
  • Over the past eight weeks, IMD has experienced a rapid recovery in the heavily impacted North American region, although South America has been slower to reactivate projects. West Africa stayed strong while South Africa and parts of Asia under extreme lockdown are starting to resume operations. Australia remains resilient and largely unimpacted;
  • Management pointed to a big drive from governments around the world to get their resources projects back up and running. Although the initial response was to lockdown economies to combat the pandemic, the preferred strategy now appears to operate but with strict social distancing measures in place. Miners have responded by implementing changes to rosters and operating practices which appear to have been effective so far;
  • Client feedback suggests a positive medium-term industry outlook, underpinned by strong underlying fundamentals – commodity prices are high, grades are generally declining and there has been a distinct lack of major discoveries across key global mining regions.
  • Robust commodity prices, particularly gold, have also recently driven a strong wave of junior capital raisings and supported a rapid remobilisation of junior exploration sites, well ahead of IMD’s internal expectations;
  • IMD called out accelerating structural demand for technologies that support remote working, such as its IMDEXHUB-IQ cloud platform and software. This is a key differentiator and important component of the customer value proposition;
  • The ongoing digital transformation project has significantly increased the company’s ability to respond to disruptions like COVID-19, while also reducing operating costs. Consequently, IMD said it has strategically brought its digital strategy forward by about 2 years in the past month;
  • Reduced headcount over the past few years will benefit FY20 results and are expected to remain permanent cuts.
  • Although some of the new product trials were initially put on hold while clients dealt with the COVID-19 disruptions, none have been cancelled with some starting to resume and more being booked for restarts in the coming months.
  • A key positive within the update was much better than expected trial results for the innovative ‘BlastDog’ product which sits at the back of the new product commercialisation sequence. Management disclosed that the outcomes of the trial were ahead of plan so scope exists to materially accelerate the product’s path to market.
  • IMD believes the company is still at the early stages of being able to maximise the revenue per project site potential. Although the business is exposed to around 70 per cent of sites globally, it still only provides a single solution at the vast majority of these – with multi-solution penetration in the single digits, a long growth runway exists.
  • Management have not provided FY20 earnings guidance. With the business recovering faster than expected, we see some upside risk to consensus estimates. IMD has a strong balance sheet in a net cash position while valuation remains attractive for the growth potential, in our view (7x FY21 EBITDA).

The Montgomery Small Companies Fund  owns shares in IMDEX. This article was prepared 02 July with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade IMDEX you should seek financial advice.

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Dominic is the Portfolio Manager of the Montgomery Small Companies Fund. Dominic joined Montgomery in August 2019 after spending thirteen years specialising in smaller companies in portfolio management and equities research. Most recently, Dominic was a Portfolio Manager and Senior Research Analyst at MHOR Asset Management in Sydney for three years. Prior to this, he ran Deutsche Bank’s Small Caps Equity Research Team in Sydney for six years. He was also previously Head of Research at Foster Stockbroking.  

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Good summary Dominic, thanks very much.

    Do you have any thoughts on revenue / EPS estimates and projections when compared to 2019 and then looking forward to 2021 and beyond.

    And similarly, the impact of Covid when considering short to medium term financial performance.

    Pascal.

    • Pascal, thanks for your feedback and question. Management are comfortable with current consensus estimates which are for a broadly flat earnings profile in FY20 and FY21 (EBITDA c.$54-55m, EPS c.6.5-6.7cps), noting upside risk to FY21 given the relatively strong recovery seen to date. COVID materially impacted Q4 as many global operations shutdown although the bottom was seen in April with a recovery experienced since. The company remained cash flow positive despite the hit to earnings. Q1 will likely be down on the prior year as the industry resumes activity. Seasonally, Q2 and Q3 are typically strongest. The other factor to consider is the new pipeline development which will likely be second half weighted in FY21. So FY22 should see a big step up in earnings as the sector fully recovers and the new products ramp up. Consensus currently estimates $67m EBITDA in FY22 which looks reasonable considering the pipeline potential. Cheers.

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