Valuation the top of the list In our view IDL?s equity is too cheap, with our PO implying 57% TSR and equity trading at a mere 7.1x FY12E PE and 5.3x EBIT. In this note we set out 10 key reasons to buy the stock ? the most important including valuation, above consensus estimates, improving earnings quality and a strong balance sheet. Once the market appreciates these factors we see a significant re-rating opportunity.
Quality and organic growth overlooked Earnings quality is improving alongside diversification at Huddy?s (clients /regions & commodities), growing aftermarket sales within the OEM business and cash flow conversion. We calculate 49% of FY11 revenue is organic, increasing to 79% in FY12 which highlights a strong track record of leveraging acquisitions. After a 3-year period of declining returns FY12 should see 33% EBIT growth, 40% EPS growth and material improvements in ROIC and ROE.
Consensus needs to re-base higher MLe?s FY12 & FY13 estimates sit 16% & 20% above consensus; appreciation of a rebound in Huddy?s, momentum in CAS-CAM and renewed demand for diesel products will lead consensus towards our estimates.
Valuation is too cheap at 7.1x FY12 PE and 5.3x EBIT Currently trading at FY12 PE of 7.1x and EV/EBIT of 5.3x. At a significant discount to EBIT & PE multiples and our DCF. An average of all three yielding $2.27/share and a TSR of 57% including dividends. On relative terms the FY12E PER is at a 48% discount to the broader Smaller Ordinaries Index (XSO) and a 47% discount to broader mining services companies.
IDL Price at posting:
$1.49 Sentiment: Buy Disclosure: Held
