What the Brokers Say
WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.
Tungsten Mining (ASX: TGN)
Tungsten Mining is a tungsten-only explorer that is primarily focused on developing its high-grade Kilba project (100 per cent), located in the Gascoyne region of Western Australia.
Kilba represents a high-grade, near-surface exploration target of 1.2 to 1.4 million tonnes at 0.6 to 0.8 per cent tungsten, based on historic exploration conducted in the 1980s.
After listing in December 2012, raising $5.1 million in the process, TGN commenced Phase 1 of its reverse circulation (RC) and diamond drilling program.
Phase 1 returned some promising high-grade, wide intercepts at shallow (open-pit) depths, including 14.5 metres at 0.8 per cent tungsten (from 42.5m).
These results replicated the historic drilling results across the same cross sections.
With the completion of the Phase 2 and 3 drilling programs, TGN is aiming to define a JORC-compliant resource by April 2013.
The company plans to undertake feasibility studies over the next four to six months, with the aim of defining an operation capable of producing up to 100,000 MTU tungsten per annum for a low capital expenditure (CAPEX) in the order of approx. US$30 million.
Such an operation could generate $28 million p.a. in revenue at the current tungsten concentrate price.
Recommendation: Speculative BUY
Decmil Group Limited (ASX: DCG)
Earnings risk now skewed to the upside
Decmil Group announced it has won a $137 million contract for the construction of a village on Manus Island in Papua New Guinea (PNG) for the Australian Department of Immigration and Citizenship.
Commencement on site is due this month, with anticipated completion by 31 January 2014.
The contract brings the FY14 construction order book to a solid level, such that no more work needs to be won for FY14 to meet implied market expectations, in our view.
Visible contracting revenue for FY14 of $390 million
We estimate that the FY14 construction order book is now approx. $250 million (excluding the $71 million Roy Hill contracts).
We still expect EDE to contribute at a minimum $140 million of revenue, and hence we believe there is visible revenue for contracting of $390 million. Hence we are very comfortable with our contracting revenue estimate for FY14 of $440 millon.
As a reminder, we assume increasing EBITDA margin assumptions for construction. While this could sound counter intuitive to some, there is sound reasoning. Our gross margins assumptions are approx. 15 per cent, but we expect a considerable reduction in divisional overhead expenses (from a peak of aprox $28 million per annum back to approx. $9 million per annum – more akin to FY07 levels).
The divisional overhead had been rapidly increasing as a result of skills shortages (ie carrying the expense of a latent pool of project managers) and the rising tendering costs (cost inflation, the number of tenders and the complexity/size of tenders).
With the lower industry pipeline of projects, we expect the divisional overhead to fall significantly and, in the short term, DCG should be able to retain this margin improvement.
Hartleys expects FY13 EBITDA of $67.5m, FY14 $77.4m
Our headline earnings estimates barely changed. For FY13, we expect NPAT of $43 million (reported NPAT $63.9 million) and have increased our final dividend estimate to six cents per share (from four cents per share).
We are more conservative on our debtor assumptions though and have reduced our net cash estimate at June 2013 to approx. $35 million.
We expect FY14 EBITDA of $77.4m and NPAT of $47.3m.
Maintain Buy recommendation
We value the Queensland village at approx. $1.20 to $1.60 per share (depending on one’s EBIT multiple assumptions and the depreciation in the village).
We value the combined construction and EDE contracting business at $1.58 (based on approx. $440m of perpetual revenue and a 6x EBIT multiple).
Combined with annual estimated overheads of approx. $11 million per annum and the cash on the balance sheet, we value DCG at approx. $2.76 on a multiple basis.
We see an additional approx. 50 cents of upside from better than expected contracting and another approx. 80 cents if the company secured another owned and operated 1,000 man village at cost (for example the final stage of the Gladstone village).
We have a twelve month price target of $2.96 and maintain our Buy.
Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.