Hunting PLC: Equity Development
Commentary and financial metrics in Hunting’s AGM/Q1 update confirm that the company has progressed in line with its FY24 targets thus far in year-to-date trading. Q124 EBITDA was well ahead year-on-year. This represents a good step towards the flagged US$125m-135m range for the year, with ongoing momentum in the strongest market segments. Guidance and our own expectations are unchanged, but our fair value adjusts up to 436p per share (from 407p).
Group revenue has continued to grow well, being up c.16% year-on-year in Q1 and c.7% ahead compared to Q423, a strong quarterly close to FY23. Shipments against previously disclosed large contracts in the OCTG and Subsea product groups and broad business development in Advanced Manufacturing have been the primary drivers in generally firm underlying markets. Perforating Systems has been the exception to this, with still lacklustre North American onshore drilling activity, though expectations remain for LNG-driven improvement here as the year progresses. While the group order book has nudged c. US$21m lower than the year end position as larger orders are worked through, US$544m on hand at the end of March still represents a strong position in a historic context.
The indicated first quarter group EBITDA of c.US$28.9m (versus c.US$22.4m in Q123) represents c.22% of FY24 guidance, taken at the US$130m mid-point. The inferred 11.8% Q1 EBITDA margin is 120bp higher than Q123. Given management’s expectation of a full year outturn in the 12-13% range, further progress is anticipated as the year progresses (repeating a pattern also seen in FY23). Supporting group progress, working capital absorption in Q1 has driven a period end net debt position of c.US$34m (pre IFRS16, company basis) from a modestly geared position at the start of the year. Inventory build, to meet the aforementioned large contract shipments, is likely to have been a significant contributor to this outflow. Absent similar sized contract wins for mobilisation in H2/Q4, we are aligned with management expectations for inventory positions unwinding over the remainder of the year.
Valuation: shares are rising, but still on a discount to fair value
Some profit-taking was seen post the FY23 results (on 29 February) but Hunting’s share price has resumed its upward trend in the last month and now stands close to its recent 12 month high. In our DCF modelling, the current share price is generated from long term EBITDA approaching our FY25E EBITDA; as previously noted, management targets are materially higher than this. Updating our P/E and DCF methodology for market movements (including £/US$1.25) now yields a blended fair value for Hunting of 436p per share (c.22% above the current share price).
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