- Imdex a provider of drilling products and services - Reported strong interim earnings - Moelis rates stock a Buy - Upside potential from further increases in exploration spending

By Chris Shaw

Western Australian-based Imdex ((IMD)) provides drilling products and services to the minerals and oil and gas industries both in Australia and overseas, in particular supplying drilling fluids and down-hole instrumentation.

The interim earnings result for Imdex of a profit of $12.1 million was strong, stockbroker Moelis noting earnings per share (EPS) rose by 170% on a pre-amortisation basis. Revenue from the recently segmented Minerals division rose 75%, while margins doubled from the previous corresponding period. Oil and Gas division revenues rose 21% in the period.

Previous earnings commentary at Imdex's annual general meeting indicated EBITA (earnings before interest, tax and amortisation) for 1Q11 was $11.3 million, which implies 2Q11 EBITA of $9.9 million. In Moelis's view this was a strong result given a traditional seasonal slowdown at the end of the calendar year.

Management at Imdex is comfortable with forecasts for a 20% increase in global minerals exploration spending in 2011, so post the interim result Moelis has lifted its EPS forecasts by 15-18% for FY11 through FY13.

Moelis is now forecasting EPS of 15.4c this year, 18.3c in FY12 and 20.8c in FY13, which compares to BA Merrill Lynch forecasts of 15c in FY11 and 22c in FY12. BA-ML is the only broker in the FNArena database to cover Imdex.

Moelis suggests there is scope for earnings to come in above forecast, as key Imdex client Boart Longyear ((BLY)), a fellow drilling products and services provider, recently commented junior resource companies had not yet begun to lift spending following widespread recapitalisaiton activity last year.

If spending among the juniors picks up it could spur industry growth according to Moelis, while the broker remains of the view the global commodities exploration cycle remains many years away from its next peak.

Given such an outlook Moelis sees current forecast earnings multiples for Index of 12.3 times this year and 10.3 times in FY12 as undemanding. This supports a Buy rating, with a price target of $2.40. This closely matches the view of BA-ML, which also rates Imdex as a Buy with a target of $2.43.

Shares in Imdex today are slightly higher and as at 10.50am the stock was up 1c at $1.90. Over the past year the shares have traded in a range of $0.60 to $2.12, the current share price implying upside of around 28% to the targets of Moelis and BA-ML.

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