conviction buy: 70 cents

MF Global have put out a Conviction Buy on AZG at 70 cent.

Quick Snapshot below.

BASIC INDUSTRIES | MINING SERVICES
Allmine Group (AZG AU): Conviction BUY
INITIATION REPORT


■ We are initiating coverage of Allmine Group with a Conviction BUY recommendation and a target price of 70c

■ A unique mining services company. Allmine listed on the ASX in February 2011, operating as a ?one stop shop? for fixed and mobile plant maintenance and mining consumables business. In March 2011 the Group entered into a binding term sheet to acquire Arccon, a Western Australian based engineering and construction company. We believe the combined business to be highly compelling for the following reasons:

? Life of mine service proposition with Arccon focusing on EPC and Allmine on maintenance, and led by an exceptional management team (including the founders of Minproc Engineers)

? Asset light and low gearing operating model, with the potential to deliver high ROCE and alleviates the necessity to debt load the balance sheet

? Expansion into strong end markets. There is significant underlying growth in capital expenditure in Western Australia, and this is coupled with an increasing trend for outsourcing to holistic service companies

? High growth and synergy potential. Arccon has a significant pipeline of existing contracts and potential contracts. The Alliance Agreements with China Metallurgical Corporation & China Non-ferrous Engineering provide Arccon with a highly competitive proposition to deliver capital solutions alongside EPC contracts and access low cost key construction inputs. There are no Western world engineering companies offering the same service. There is high potential for internal sales across the existing Allmine maintenance divisions. In particular, new Arccon projects provide opportunities to expand the maintenance division significantly

?For the analyst certification and other important regulatory disclosures, please refer to the Regulatory Disclosures Section, located at the end of this report.


Outperformance expected. Given the unique business model and number of new potential growth channels and synergies, we forecast strong increases in revenue and believe that EBITDA margins of 17% plus are sustainable (peer group average 12%, leader with 20%)

■ Valuation. We set our target price at 70c, based upon 12x 2012 fully diluted earnings (280m shares) which is the average multiple for its peer group. From our scenario analysis, we see share price upside even when applying EBITDA margin and PE multiples from the low end of the peer group range