It's not every day that a company rises after posting plummeting revenues and profits, but both Ausdrill Limited (ASX: ASL) and Worleyparsons Limited (ASX: WOR) have experienced this strange trading pattern in recent days.
Worleyparsons rose 5% yesterday when its annual results were released, although it has lost most of that ground this morning. Ausdrill too rose 5% so far this morning, though based on its results I'm not sure if the rally will be sustained:
- Revenue fell 7.3% to $767.6m
- Loss after tax of $175.6m (loss of $43.9m in 2014)
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) declined by 34% to $114.7m excluding significant items
- Earnings Before Interest and Tax (EBIT) margin fell from 8.8% to 3.2%
- Cash of $360.7m
- Gearing (debt divided by debt + equity) of 39.5%
- Outlook for continued tough times in 2016
So What?
To Ausdrill's credit, management takes a pretty open and straightforward look at why profits and revenues crashed. Mining companies are taking much of their drilling and blasting work in-house (resulting in less work for Ausdrill), while exploration budgets have been slashed thanks to low commodity prices (also resulting in less work for Ausdrill).
Additionally, redundancy costs and low utilisation for Ausdrill's equipment hire services played a part, as did foreign exchange rates. The company's future in 2016 and beyond is pretty cloudy as a combination of low exploration, high competition and low commodity prices are not ideal business conditions.
Some tailwinds exist in the form of a weaker Australian dollar (making domestic commodity production more appealing) and higher production volumes, especially in iron ore, but it is uncertain how much of this will translate into more work for Ausdrill.
Now What?
It is a good sign that Ausdrill continued to win contracts throughout 2015 as this indicates its ability to pitch and deliver work to customers hasn't been impacted by tough trading conditions and cost-cutting procedures. Additionally management has identified $24m of 'efficiency gains' to be made over the next 24 months.
The downside however, far outweighs the positives. Weak margins are likely to continue for the foreseeable future while gearing is high and leaves the company vulnerable to earnings shocks. Ausdrill bonds have traded below their face value in the past 12 months, which also indicates some investors have doubts about its future ability to make repayments.
On balance, I would steer clear of this sector for the time being.
