The recent round of profit reports has shone a spotlight on the performance of Western Australian companies tapping into the surging activity in the resources sector.
While many are making a tidy profit, there are a handful that stand apart for their ability to deliver consistently good results and reward shareholders.
NRW Holdings, Ausdrill and Imdex, which have all enjoyed a strong run in their share prices over the past month, are prime examples.
Mining and civil contractor NRW reported an increase in half-year net profit to $45.3 million and an interim dividend of eight cents a share.
Both were better than brokers had been anticipating and that has triggered increased support for the stock.
Deutsche Bank said its “buy rating conviction is stronger” following the result, and increased its target price from $3.50 to $4.10.
“We recognise that the stock price has had a good run, however, we also think earnings risk has decreased somewhat, particularly as margins have shown significant improvement,” Deutsche said.
Hartleys is even more bullish, with a 12-month price target of $4.52.
It anticipates a full-year net profit of $95.3 million and a dividend of 17 cents a share in the current financial year and an even stronger net profit of $110 million in the following year.
Drilling contractor and equipment supplier Ausdrill, which reported an interim profit of $54.6 million, is another stock with strong broker support.
Hartleys has forecast further strong growth in earnings, saying it likes Ausdrill’s geographic (Africa and Pilbara) and commodity (gold and iron ore) exposure.
The company is also diversifying into Queensland’s fast-growing coal seam gas sector, with subsidiary Energy Drilling Australia winning a second contract this week.
EDA has ordered three drill rigs specifically for that sector and is aiming to have six rigs by the end of the 2013 calendar year.
With each rig costing about $10 million, that is a major commitment, but the company is confident there will be plenty of work in Queensland, where the three largest companies are planning to drill 20,000 wells by 2016.
A much smaller company is Imdex, which is a specialist supplier of drilling mud and down-hole instrumentation.
It reported an interim profit of $22.7 million and a dividend of 3.25 cents a share, which were either in line with brokers’ forecasts or better.
Deutsche said the result reflected buoyant global minerals exploration activity.
Hartleys maintained its buy recommendation for Imdex, which it described as a “high quality, high return on capital business with cyclical exposure, strong earnings momentum and trades at low earnings multiples”.
The buy recommendations for NRW, Ausdrill and Imdex reflect both their strong earnings outlook and the gap between the market price and the brokers’ target price.
Some other stocks have an equally strong earnings outlook, if not better, but are not seen as good buying opportunities because their share prices are already high.
One such stock is engineering and construction contractor Monadelphous, which reported an increased half-year net profit of $57.5 million.
“We continue to expect 2012 and 2013 to be strong years for Monadelphous, driven by high levels of tendering activity and record capex spend by major mining and energy companies,” Deutsche said.
However, with the company trading at a 40 per cent premium to peers, Deutsche concluded there was better value elsewhere in the sector. Hence, it has a hold recommendation.
