FIIG - The Fixed Income Experts

News and Education

Ausdrill reports on 1H15

by Alen Golubovic | Mar 03, 2015

Key Points

  • 1H15 revenues were slightly down (2.3%), however the significant falls in EBITDA (37%) and EBIT (63%) reflect the competitive and tough operating conditions in the mining services sector
  • Impressively, Ausdrill was able to increase its net operating cashflow (up 17%) and slash capital expenditure despite these challenging conditions
  • FY15 outlook is for second half year levels to be broadly in line in with 1H15, which translates to a FY15 EBITDA of around $120m

Results Summary

  • Revenues down 2.3% to $413.6m
  • EBITDA down 37.2% to $59.1m
  • EBIT down 63.1% to $15.0m
  • Statutory loss after tax and impairment charges of $177.1m
  • Operating cash flow is up 17% from $65.7m to $76.9m, while capex has been slashed by 61% from $31.9m to $12.6m. Net capex has been restricted to only $9.9m
  • Net debt down from $400.9m to $391.4m
  • Gearing ratio is up from 34.8% to 40.4%, however this is largely due to non-cash asset impairments


Ausdrill’s operating result reflects the ‘margin squeeze’ which is directly a result of the slowdown in mining activity and the fall in key commodity prices (such as iron ore). While revenues are only slightly down on the prior period, EBITDA and EBIT margins have been significantly impacted as a result of competitive tension/tendering and reduced demand. We note that earnings were broadly in line with analyst expectations following consecutive earnings downgrades from the company over the year. Following the 1H15 results announcement, Moody’s downgraded Ausdrill’s credit rating by one notch.

Impressively, Ausdrill was able to increase its net operating cashflow and slash capital expenditure despite these challenging conditions, generating positive free cash flow of $67m. The company has stated in the presentation that capital expenditure is to be restricted with replacement capex to recommence in 2 years’ time, so we can assume that a low level of capex (~$10m net) can be maintained over the next couple of years.

A key issue will be currency – with a number of key African contracts being terminated, the natural currency hedge which Ausdrill talks about is being eroded. The falling AUD resulted in an A$52.3m increase in the US dollar debt outstanding (which includes the bonds). This largely netted off the company’s efforts in paying down debt, with net debt only down by $9.5m to $391.4m

On balance, the payment of a $6.2m dividend was not a prudent credit action given the current climate for mining services, however it was a moderate amount overall. We also don’t think the stated continuation of meeting a dividend payout ratio is a prudent course of action from a bondholder perspective, when the business is operating at such tight margins.

We reiterate Ausdrill is a stronger credit than Emeco however the entire mining services sector continues to face significant challenges until a recovery point and this ‘uncertainty premium’ has been factored into bond prices across this sector. The company has had 3 earnings downgrades in a relatively short time-frame and is on negative outlook with both Moody’s and S&P.

Having said this, Ausdrill’s core market is gold generating about 2/3rds of revenue, which has been one of the more resilient commodities in the current cycle. To the extent gold exploration activity does pick up, Ausdrill will be well placed to win business on the upturn. However, we remain somewhat sceptical about the company’s statements of a resumption in gold exploration activity later this year, and will be looking for more concrete signs of a pick-up in activity before we start calling a recovery. We also note the 2 year restriction on capex which the company has stated (suggesting potentially a longer time to recovery than end FY15).

The discounted bond price on Ausdrill reflects market sentiment/concern around the risk of a sustained continuation of a downturn in mining activity, triggering further falls in revenue and profitability. We also see the debt revaluation as a potential key risk if the AUD continues to weaken, as this will drive up A$ leverage and increase the principal pay down needed at maturity. However, we expect the continued resilient cash flow performance and low capex can support ongoing interest payments plus a continued reduction in net debt. The company still maintains a reasonable net interest coverage (EBITDA / Net Interest) of 3.8x in the context of a cyclical downturn in a high risk industry, which remains above the bank imposed covenant of 3.0x. With a continued strong cash flow / EBITDA conversion, and very tight capex, the company is giving itself breathing space to manage its way through the bottom of the cycle.

With a net secured debt / EBITDA ratio of 0.1x, the majority of the secured debt is currently covered by cash, which provides support for a degree of recovery on the bond in default. S&P evaluates the recovery on default at an ‘average’ level of 30%-50% on the unsecured bond which is fair.


For an investor with a high risk/reward appetite, and willing to bank on a mining sector recovery pre 2020, Ausdrill may provide a speculative buying opportunity with the very high yield on offer. Having said this, we do think there remains a real risk of further earnings downgrades over the course of FY15 given recent history, that we haven’t yet reached ‘the bottom’ and are still some time away from a recovery.

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Disclaimer Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG Securities Limited (‘FIIG’) provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. FIIG’s AFS Licence does not authorise it to give personal advice. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. FIIG, its staff and related parties earn fees and revenue from dealing in the securities as principal or otherwise and may have an interest in any securities mentioned in this document. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.