IMDEX share price falls despite record results

Mining-tech small-cap IMDEX (ASX: IMD) released strong results on Monday, reporting record half-year revenue up 34.9%, record EBITDA up 55.1%, record NPAT up 80.8% and a fully franked interim dividend of 1.5 cents per share, up 50% from the first half of 2021. 

"Our record half-year financial results were driven by our strong operational performance during a demanding and ever-changing market," IMDEX chief executive Paul House said.

"The strength of our results can again be attributed to the expertise, dedication and resourcefulness of our global team to meet these changing client needs." 

However, it would seem investors are not at all impressed (or are taking profits while they can), with IMDEX's share price falling around 4.73% at the time of writing. 

Maybe it's because the mining-tech company noted it was anticipating "additional expenses" in the second half of 2022 "due to the inflationary environment, together with increased travel and marketing costs as mobility restrictions ease." 

Or perhaps, after a stellar run over the past year (IMDEX's share price is up around 57%), its PE ratio of around 20 times doesn't exactly look "cheap" in said inflationary and rising rate environment, particularly when its peers are trading on single digits. 

So to get to the crux of IMDEX's result (and subsequent share price sell-off), I spoke to Wilson Asset Management's Oscar Oberg for his outlook on the stock. 

Note: This interview took place on Monday 7th of February 2021. 

1H22 key metrics (Source: IMDEX)

What were the key takeaways from the result?

It was a really good result. IMDEX has held up well over the sell-off period in January, so it needed to be an extremely good result for it to burst through that $3 mark. As shareholders, we're very happy.

For us, the health of the business is shown by the top line, which beat our expectations, and analysts' expectations, quite considerably. But largely due to COVID-19 and the business pivoting with this new direction into sensors and also into technology, there's a reinvestment phase that's needed.

As the top line is so strong, they can reinvest a lot of those gains. That restricts the operating leverage a bit, however, it's still above consensus expectations and will be for the next half as well. We expect earnings numbers to go up tonight.

There's $30 million of net cash on IMDEX's balance sheet. There's an array of opportunities, acquisition wise, which they can look at. Given they've made a handful of acquisitions over the half, we expect those to come through over the next one to two years.

The revenue growth stood out to me, it grew 35% for the half and outperformed exploration spend that we track, which indicates they're taking market share.

January started off really well. The key is, where is the growth from here? It does feel like Australia and America have reached their capacity with the constraints that we have with COVID-19. We think as these restraints come off throughout the year it will further benefit the company in due course. 

What was the market’s reaction? Do you think this was an overreaction, underreaction, or appropriate?

That's a good question. I think it was probably appropriate. The company held up so well over November and December. If you have a look at it on a relative basis to most small-cap industrial companies and the valuation of the company, it needed to be exceptional.

In January, most small-cap industrials were down between 10-15%. IMDEX was down 0.3%. IMDEX massively outperformed its peers and investors are likely just taking profits in what is a choppy market.

I think what the market is a little bit concerned about is the additional cost going into the business into the second half and into next year.

Based on what we've seen so far in reporting season, a lot of the companies that were expected to update and have a very good result, have bounced early and then been sold off. So when I saw IMDEX's results this morning, I thought that would probably be the case. 

Were there any major surprises in the result that you think investors should be aware of?

Would you buy, hold, or sell IMDEX following this result?

We own it, we still think it's a buy. We think exploration is going to be stronger for longer for the next two or three years.

The interesting juncture for this company right now is preparing for when that downturn occurs. They've got a very strong balance sheet. The question is, what do they do with that cash?

I wouldn't say that's anything revolutionary. It's the next phase for this business. The management team have done such a good job reinvesting. Based on the current earnings trajectory, we think the stock's worth $3.50-$3.70. But what could drive it well beyond that depends on what they do with that cash. 

What are your expectations and outlook for IMDEX and the mining services industry?

I'm positive on the sector. The companies exposed to exploration should report well: ALS (ASX:ALQ), IMDEX, and DDH1 (ASX: DDH). So the others, such as Monadelphous Group (ASX: MND), NRW Holdings (ASX: NWH) and Perenti Global (ASX: PRN) - a lot of the contractors, they've been smashed over the last 12-18 months, largely because of the cost pressures around labour and state borders being closed in Western Australia. Now, if your view, like ours, is that Omicron is coming off, then these companies look interesting right now, because this should be the worst it gets for them.

In a rising inflationary environment where resources generally should do well, these stocks are trading between five to seven times earnings. They're the cheapest stocks in the market.

There's a lot of water under the bridge; we're not fully open as yet. There could be another variant. But I think the moment Western Australia opens those borders, it will be extremely positive for a lot of these companies that have been sold off so heavily.

I think mining services will be a very interesting space to watch this year. It's been a shocker for the last few years, and to be fair, I think we all thought it would be a lot better than what it's been. But we're getting closer to the bottom here. To me, I think it looks interesting.

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