Drilling Services Division Will Benefit From Increased Exploration Activity In FY '25

Key Takeaways

• Successful acquisition and integration in Drilling Services are set to enhance revenue, margins, and earnings growth amid increasing exploration activity.
  
• Contract negotiations and strong project pipeline in Mining Services and North America promise revenue growth and improved margins, enhancing cash flow stability.
  
• Dependence on exploration and contract extensions poses revenue risks amid financial uncertainties from high interest costs and commodity price fluctuations.

Catalysts

Operates as a mining services company worldwide.

• The acquisition and integration of DDH1 Drilling, Ranger, Strike, and Swick into the Drilling Services division have resulted in identified cost synergies that position the division for potential revenue growth and margin improvement, especially as exploration activity increases. This is likely to positively impact earnings and EBITDA margins.
  
• The Drilling Services division, now the second largest globally, is poised to benefit from a forecasted increase in exploration activity, which is expected to improve utilization rates and drive revenue growth in the latter half of FY '25, enhancing overall earnings.
  
• The Contract Mining division, accounting for a significant portion of group revenue, anticipates a step-change in its work with over $2 billion worth of contracts in late-stage negotiations. Successful contract finalizations will support revenue growth and could enhance net margins through scale efficiencies.
  
• The expected return to historical utilization levels for the BTP fleet in the Mining Services division in the second half of FY '25 could boost revenue and contribute to a sequential improvement in EBITA margins as idle assets become productive.
  
• A strong pipeline and late-stage negotiations for significant projects in North America, particularly the Goldrush Underground project, indicate potential expansion and revenue growth opportunities for Barminco in a key market, which should support long-term earnings and cash flow stability.

Perenti Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Perenti's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 5.7% in 3 years time.
• Analysts expect earnings to reach A$220.1 million (and earnings per share of A$0.24) by about April 2028, up from A$87.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$159.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 12.4x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.82%, as per the Simply Wall St company report.

Perenti Future Earnings Per Share Growth

Risks

• The Drilling Services division's heavy reliance on exploration activities, which remain below historical averages, poses a risk if recovery in exploration fails to materialize, potentially impacting revenue and earnings.
  
• Contract Mining's financial performance is vulnerable to fluctuations in commodity prices or project-specific challenges, as seen with the underperformance of Zone 5 in Botswana, which can adversely affect revenues and EBIT margins.
  
• The increase in net interest costs due to new U.S. notes could put pressure on net margins, especially if the company's efforts to reduce gross debt do not offset the higher interest expenses.
  
• The negative free cash flow in the first half of FY '25, despite expectations of stronger cash conversion in the second half, introduces uncertainty regarding cash flow stability and long-term financial health.
  
• The reliance on contract extensions and new contracts for future revenue growth implies execution risk; any delays or failures in finalizing these $2 billion in near-term contracts could impact future revenue visibility and growth.

Valuation

• The analysts have a consensus price target of A$1.443 for Perenti based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.6, and the most bearish reporting a price target of just A$1.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.9 billion, earnings will come to A$220.1 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of A$1.16, the analyst price target of A$1.44 is 20.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.