Ausdrill upgraded as Macmahon walks away

Brokerage Hartleys has upgraded its rating for Ausdrill Ltd to Buy after Macmahon Holdings Ltd allowed its takeover bid to lapse.

The takeover target was previously rated as a Speculative Buy with Hartleys saying it was concerned about selling pressure after the Macmahon takeover offer expired, however the weakness in today's market represented a good buying opportunity.

Earlier today, Macmahon said it had received some 16 per cent of acceptances to the offer with 10.6 per cent of those held under an institutional acceptance facility.

However those shares are now void as conditions of the takeover were not met.

Macmahon launched the takeover in late May this year, and had originally offered 1.45 of its shares for each Ausdrill shares before increasing it to 1.65 shares. At the end of the offer, Macmahon held 4.4 per cent of Ausdrill shares.

"We have upgraded Ausdrill Ltd (ASL) to a BUY this morning because we believe the stock is oversold at current levels," Hartleys said in a brokers report.

"We believe buying ASL near $1.60 ... is a good entry level."

Meanwhile the brokerage lowered Ausdrill's 12-month share price target from $2.54 to $2.01.

"The key risks are earnings disappointments and project delays," Hartleys said.

"In addition, the mining services and resource industries are volatile and earnings can disappoint due to cost overruns, project delays, loss of contracts or slower than anticipated new project wins. ASL has long term contracts so the near term this risk is mitigated.

"Although some earnings disappointments can be short term and only a timing issue, other disappointments can be materially value destructive and can sometimes overhang stocks for a long period of time (for example contract disputes).

"Such disappointments can be difficult to predict and share price reactions can be severe and immediate upon disclosure by the company.

"High financial leverage can add to the problem."