valuation has just increased, page-6

Reply to AJ14,

My undertsanding on the equipment fleet value and financing. Not all equipment would be funded by hire purchase / borrowings. However when it is they fund purchases on a 3 year hire purchase arrangement on gear that will be rented to clients for a longer period. Thus the gear owes them nothing before the contract ends (but they still own the gear). This is the reason why you see a fleet value way in excess of funding. It is also worth noting that these are heavy duty motors (Cat diesels) and pumps and their useful life is 10 years plus (probably more like 15 years), and also not subject to obsolesence (albeit as the gear gets older there is more maintenance spend - and Resource Equipment maintain the gear well so that they do not have problems in the field). Over time there becomes a greater proportion of the equipment fleet that is owned free of finance and still earning the same, or higher, hire rates.

Thus it is right that in times of great growth the business is capital intensive, however the flipside is that once owned the gear remains for rehire and the larger the wholly owned fleet is the greater the free cashflows that this will throw off. I also note that whilst it looks like there is 3-5 years of incredible growth ahead, this company will still manage to derive healty profits and cashflows (note that there is a high level of depreciation which helps offset the capex). Also that they started public life with a company shell(the old Repcol debt collector!) with $28m in tax losses. They have used $8m last financial year, $5m for the first half, and thus have $15m of tax losses left before they have to pay tax. this "tax holiday" prevents tax leakage and allows them to use money saved to contribute towards the cost of fleet expansion. It really has been a marriage made in heaven!

In terms of your other question re same teams doing the work, I am afraid not. The DSA business is on site before Resource Equipment rentals are, as they install the pipe infrastructure, which ultimately gets hooked up to Resource Equipment gear. the benefits of the acquisition are therefore that this is a vertical integration / complementary acquisition which expands the customer relationship, rather than as so often is the case a simple acquisition of a competitor for market share purposes. So RQL will now get wind of new work earlier as DSA get called earlier on these jobs and will be able to sell a complete solution. Likewise RQL has made great inroads into the Eastern States market (particularly QLD) and will be able to secure work for DSA amongst this customer base. Obviously there may be some areas of cost synergy, such as engineering, and all back office functions.

Having recorded a strong first half, RQL seems set for an EBITDA of some $16m full year. DSA looks like it will do $3-4m for FY11. Thus the new RQL will likely record an EBITDA of some $19-20m for FY11. I would expect that they can grow this to some $25M for FY12. I think the current share price reflects that earnings capacity. I expect further gains over time as this is achieved and the market then starts to set its sights on 2012, which lets face it will be an EBITDA in excess of $30m (probably $31-32M). The shares still hold upside as the PE does not reflect the growth in earnings. I also expect that they will become a tax payer during FY2012 and thus we have the prospect of this company starting to pay franked dividends.

This is my largest portfolio holding, by far, and the love affair is not over yet!!!