MENU

Is Boart Longyear Ltd worth the punt for contrarian investors?

Just to be clear, I wouldn’t touch Boart Longyear Ltd. (ASX: BLY) with a barge pole! Don’t get me wrong, I’m very partial to investing in beaten-up stocks that offer deep value, contrarian opportunities. It’s just that it’s far too uncertain that this is one of those opportunities.

On Tuesday, drilling contractor Boart Longyear reported its half-year results to the market and its share price fell 12.8%. The stock has now lost 94% of its value in the past 12 months – it makes the 10% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) look mighty appealing!

The results showed the painful effects of the ongoing contraction of the resources sector. For the half, revenue slumped to $421 million from $719 million in the prior corresponding period and the adjusted net loss after tax widened from $24 million to $68 million.

While these results are obviously bad and once again shareholders won’t be receiving a dividend, much more worrying is the net debt level which remains stubbornly high at $556 million. This situation has led management to use terms such as, “expect to be covenant compliant through March 2015 testing date”, and “material uncertainty but anticipated liquidity and financial resources available to meet business needs during pendency of Strategic Review.”

While management obviously has first-hand knowledge of the liquidity situation and believes the company can trade through, in my experience once debt levels reach these heights and managers start talking in these terms, it’s touch and go whether a company survives. What’s more, without knowledge of the re-capitalisation process investors may struggle to get an adequate return even if the company does survive.

Those buying into Boart Longyear at current levels could make a huge return – after such a large fall a big profit is certainly possible – however there are significant risks that they won’t get any return.

Boart Longyear might not bounce back anytime soon. Take a look at our top dividend stock for 2014-2015 instead

Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.