Post by
savyinvestor333 on Oct 31, 2024 4:10am
From Beacon Securities Target $4.05
Q3 Results Meet Expectations, Maintaining PT
Q3 Results In Line With Expectations - Foraco reported Q3/FY24 revenue of $78M, in line with our estimate of $78M and we note that ours was the only formal estimate as per FactSet. North America and Asia Pacific delivered second record performances in a row. North America revenue grew to $36M (up 11% y/y) due to strong performance on ongoing long-term contracts, while Asia Pacific revenue increased to $25M (up 27% y/y) attributable to increasing demand in the region combined with the acquisition and commissioning of new rigs. This strong performance was offset by underperformance in South America with revenues dropping to $13M (down 56% y/y) with the decline attributable to a lack of financing in the junior mining sector (lithium in particular) which impacted operations in Brazil combined with an unusually cold winter in Chile and Argentina that led to a significant seasonal slowdown. As a result, consolidated revenue declined 18% y/y. Adjusted EBITDA was $16M (21% margin) compared to our estimate and consensus of $17M (22% margin). Gross margin was 22% compared to 28% last year. Additionally, FAR reported EPS (diluted) of $0.08 in line with our estimate and consensus of $0.08 (see figure 1).
Continued Focus on Tier-1 Customers – During Q3, 91% of revenue was derived from work completed with tier-1 customers. This has been a continued focus for the company during a difficult financing environment for juniors. Revenue would have been up 2% y/y when excluding for the drop in demand for juniors and the strategic exit from Russian operations primarily driven by growth with tier-1 customers.
Capital Allocation Strategy to Focus on Debt Reduction – Foraco ended the quarter with $22M in cash (net debt position of $78M) and generated approximately $7M in FCF during the quarter and -$2.7M YTD. We anticipate an uplift in FCF during Q4 and are modelling approximately $20M of FCF which is largely a function of timing on collections of accounts receivable. We anticipate that the company will continue to prioritize paying down debt and to remain active on its NCIB.
Active Contract Discussions and Improving Water Segment – On the earnings call, management indicated that the company in discussions for new contracts and continues to work on extending existing contracts. The Q3 utilization rate was 40% and the company is ready to deploy from its fleet of 290 rigs upon contract wins. Full deployment of new rotary rigs in western Australia have been received well and the company recently received an innovation award for its state-of-the-art NGBF rotary rigs which is garnering additional interest from customers. A second rig is being prepared for work and a third rig will arrive as scheduled to site later this year. As a result, the water business represented 14% of revenues this quarter with 32% gross margins (up from 17% in Q1) and we remain optimistic on the growth potential of this segment with margins remaining near historic levels.
Maintain Buy Rating and C$4.05/sh PT – We are modelling a slight sequential improvement in Q4 with revenue of $80M, adjusted EBITDA of $17M and EPS (diluted) of $0.09. We also made minor revisions to our FY24 and FY25 forecasts (see sidebar). 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. We maintain our Buy recommendation and $4.05/sh PT (80% upside) which is based on a 3.75x NTM EBITDA multiple