Foraco International SA T.FAR

New Beacon Report Target $3.50

[savyinvestor333]

Foraco International SA (FAR-T) Reducing PT On H1/25 Outlook Slow Finish to 2024 - Foraco reported Q4/FY24 revenue of $61M, below our estimate of $62M and consensus $63M. Revenue was down 22% q/q and 30% y/y attributable to the decline in junior segment activity, exit from unstable jurisdictions, and FX impacts. Record performance in Asia Pacific (third consecutive quarter of record performance) was outweighed by slowdowns in North and South America activity levels. Asia Pacific revenue was up 38% y/y due to commissioning of new NGBF rotary rigs. North America activity declined 10% y/y due to phasing of contracts with majors and South America revenue declined 69% y/y due to a lack of financing in the junior mining sector and extended delays in the tendering process. EBITDA was $10M (17% margin) compared to our estimate and consensus of $12M (20% margin). We note that excluding one-time costs, adj. EBITDA would have been $14M (23% margin). Gross margin was 19% compared to 23% last year. EPS (diluted) was $0.02 below our estimate and consensus of $0.04 (see figure 1). Additionally, FAR ended the quarter with a 35% rig utilization rate (vs 55% last year), a new low since we began tracking in 2018. Reducing 2025 Estimates; Anticipating Slower Start to Year – On the earnings call, management indicated that many of the challenges faced in Q4 are likely to spill over into the first half of 2025 with a gradual turnaround expected later in the year. Order confirmations on long-term contracts have tended to be delayed and over shorter durations. We believe that we have updated our estimates accordingly (see figure 2). The order backlog remains healthy at $221M with $201M expected to be executed during FY25. This compares to the $317M ($236M executed in FY) last year. Capital Allocation Strategy to Focus on Debt Reduction – Foraco ended the year with $24M in cash (net debt position of $61M) and generated approximately $17M in FCF before debt servicing throughout the year. We remain encouraged by the FCF potential given FAR continues to generate cash during a year in which it averaged a 39% utilization rate. We anticipate that the company will continue to prioritize paying down debt (potential to reduce $14M/yr) and to remain active on its NCIB. As of December 31, 2024, FAR purchased 264k shares under its NCIB at an average purchase price of C$2.27. Maintain Buy Rating, Lowering Target Price – We continue to believe that Foraco is well positioned to capitalize on the electrification theme, exploration budgets catching up to commodity prices, and a boost of junior exploration activity. Following yesterday’s 17% price decline, we believe that shares of FAR are trading at an unwarranted discount to peers (2.8x vs peer group at 3.5x) in the space given the company’s cash flow generation, strong margin profile, and robust pipeline of potential contract wins. Upcoming catalysts include new contract wins, improved activity levels and the Q1/25 results. We maintain our Buy recommendation but have reduced our PT to C$3.50/sh (was C$4.05/sh) which is based on a 3.75x NTM EBITDA multiple.