I remain v long this one and have recently been adding to my...

I remain v long this one and have recently been adding to my position. I was disappointed with market reaction on back of what looked like a reasonable result and positive outlook. Feel market concerns are
1. The recent significant price decreases in iron ore / coal, leading to sell off of all mining services companies,
2. The reported declining margins over FY2012, possibly fearing that this is a result of competition,
3. The elusive Cons. Mins. contract extension,
4. The FY2012 cashflow report.

My views on above as follows;
1. Jamie has tried his hardest to educate market that they work for producers not explorers, their service is mission critical and not tonnes mined correlated. Thus cancelation of exploration expenditure or new mine development of minimal impact to RQL ( unlike drilling contracters and engineering firms). We may need to go thru the downturn before the market realises the difference.
2. Margins declined in the consolidated group for a number of reasons;
- increasing percentage of DSA revenues at lower margins,
- higher fixed costs on expansion of capability ahead of expected demand, this should be addressed on back of higher revenues this year,
- lower fleet utilisation, due to delayed start / awarding of work. Again should be addressed this year.
- absence of the very profitable one off sale of equipment, in FY2011, for the Japanese tsunami effort. This year RQL will benefit from a very large job it is doing assisting with the water deluge at Yallourn Energy - a very big and presumably very profitable job.
Thus margins likely to be much better this year.
3. Well don't know, and somewhat don't care, as to whether they ever re-sign this one. This business must have declining relevance to RQL as it continues to grow its revenues. I understand that they continue to do increasing amounts of work for Cons Min despite it being some 15 months since contract expired. we may be better off without a contract.
4. This I think is possibly something that frightens investors most. Their capex equalled their EBITDA. So a standstill position only because they did not have to pay tax. Tax losses now all gone so will pay full tax this year. I think this is where Jamie's explanations falls short. I think he ought to give greater colour re what capex happened late in 2012 to provide for the $35m of work commencing July 2012. must have been significant and I think that if analysts were able to adjust capex to see the true level of supporting the 2012 business they would gain greater comfort. The true test of this will be in the H1 FY2013 results. i.e. these should show an EBITDA number far in excess of the capex for the half.

I have high expectations on RQL delivering this year, circa $32m EBITDA on $125m revenue. This is likely however only to result in a marginal increase in NPAT, as they start to pay full tax. So I have a target eps of 6 cents. Given that they have flagged introducing dividends, and a DRP, I tend to agree with Stonemason that we may see a 1 cent interim, but would like to see a much larger final divi. How much they do pay will be a factor of the free cashflow generated. This is why cashflow starts to become so important.

The confirmation of business and profit growth, introduction of dividends etc should see this stock recover. At these levels we are backed by NTA, the business and its profits are free. I love it!