bell potter - ttn

8/14/2019 Bell Potter - TTN

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25 September 2013

Titan Energy Services (TTN)

Seams like there is more growth to come

Recommendation

Buy(Initiation)Price

$2.92Target (12 months)

$3.42(unchanged)

Analyst

John O'Shea 613 9235 1633

AuthorisationTS Lim 612 8224 2810

Expected Return

Capital growth 17.1%

Dividend yield 2.6%

Total expected return 19.7%

Company Data & Ratios

Enterprise value $153.7m

Market cap $141.3m

Issued capital 48.4m

Free float 62%

Avg. daily val. (52wk) $253,197

12 month price range $0.65-$3.06GICS sector

Energy

Price Performance

BELL POTTER SECURITIES LIMITEDACN 25 006 390 7721AFSL 243480

DISCLAIMER AND DISCLOSURESTHIS REPORT MUST BE READ WITH THE DISCLAIMERAND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT.

Page 1

(1m) (3m) (12m)

Price (A$) 2.71 1.45 0.63

Absolute (%) 8.86 103.45 367.28

Rel market (%) 5.32 93.69 347.67

Service provider to the CSG segment with a broad offering

TTN is in the process of evolving from a small drill rig company to a diversified service

provider to the Coal Seam Gas (CSG) to Liquefied Natural Gas (LNG) segment. The

company now offers drill rigs, mobile camps (including transport and logistics), catering

and equipment hire. This expanded offering has been orchestrated through a

combination of acquisitions and organic growth initiatives over the last two years. In

our view, the TTN service offering is compelling relative to CSG competitors.

Strong outlook for the CSG segment

Given TTN derives more than 90% of earnings from the CSG segment, the key driver

is the number of CSG wells required to deliver and maintain production levels for key

projects. With three major projects already under construction (QCLNG, GLNG and

APLNG) and others potentially to follow, industry estimates suggest the number of

wells is likely to peak at around 1,900 per annum by 2016 (~1,000 currently) with

ongoing wells of 1,300 per annum to 2025. In broad terms, this is expected to create

strong demand for services from companies such as TTN.

Growth potential outside of CSG

The company is also pursuing a range of opportunities outside of the CSG segmentnotwithstanding the fact that the growth outlook appears likely to be strong over the

medium to long-term. We consider this a sound strategy and expect the Northern

Territory (oil & gas, iron ore, minerals and precious metals) and the Cooper Basin (oil

& gas) the key target markets.

Investment View Initiate with a Buy rating PT $3.42

Our long-term DCF valuation of TTN equates to $3.97 (WACC 13.6% and terminal

growth rate 2.5%). We have set a 12-month price target of $3.42 based on a target

EV/EBITDA multiple derived from a ROIC model that looks at rolling 1-year earnings

and initiate with a Buy rating. We consider the company has a strong growth outlook

underpinned by expected CSG activity levels and the breadth of its service offering.

Absolute Price Earnings Forecast

Year end June 2013 2014e 2015e 2016e

Sales (A$m) 72.6 108.6 123.3 134.1

EBITDA (A$m) 18.9 28.4 33.3 36.9

NPAT (reported) (A$m) 9.1 14.8 17.5 19.6

NPAT (adjusted) (A$m) 9.1 14.8 17.5 19.6

EPS (cps) 22.0 30.5 36.2 40.4

EPS growth (%) 143.6 38.8 18.7 11.8

PER (x) 13.3 9.6 8.1 7.2

EV/EBITDA (x) 8.1 5.4 4.6 4.2

Dividend (ps) 5.5 7.6 9.0 10.1

Yield (%) 1.9 2.6 3.1 3.5

Franking (%) 100.0 100.0 100.0 100.0

ROE (%) 17.6 23.5 23.1 21.6

SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES


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Titan Energy Services (TTN) 25 September 2013

Contents

Summary and Investment Thesis ................................................. 3Background .................................................................................... 4Key Earnings Drivers ..................................................................... 5Financials ....................................................................................... 9Valuation ....................................................................................... 11Management ................................................................................. 12Key Shareholders ........................................................................ 14Titan Energy Services (TTN) ....................................................... 15


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Summary and Investment Thesis

Summary

TTN is predominantly a service provider to the CSG to LNG segment in Australia. The

companys business model has evolved significantly over recent years from a drilling

centric business to a diversified service provider.

We believe the business is well positioned to capitalise on its strong position in a market

segment that is expected to accelerate in the coming years. At the current share price, we

believe the magnitude of the opportunity available to the company has not yet been fully

priced in. We are initiating with a Buy recommendation and a 12-month price target of

$3.42 based on a target EV/EVITDA multiple derived from a ROIC model that looks at

rolling 1-year forward earnings.

Investment ThesisWe believe TTN has a number of investment positives that underpin our view on the

company. The highlights of the TTN business model from an investor perspective are as

follows:

1. Strong growth outlook for the CSG to LNG segment Given the nature of

TTNs service offering, the key driver of earnings is the number of CSG wells

required to deliver and maintain production levels for the CSG to LNG sector.

With three major projects already under construction (QCLNG, GLNG and

APLNG) and others potentially to follow, industry estimates suggest the number of

wells is likely to peak at around 1,900 per annum by 2016 (~1,000 currently) with

ongoing wells of 1,300 per annum to 2025. In broad terms, this is expected to

create strong demand for CSG service companies such as TTN;

2. Well positioned in CSG relative to competitors given breadth of offering

The Company has extended its service offering over recent years to include

camps, transport and logistics, catering and equipment hire. This has been

achieved through a combination of organic growth and acquisitions. A detailed

review of key competitors indicates that TTN now has significant breadth in its

CSG offering which suggests to us that it is well positioned to increase share of

wallet in the CSG segment; and

3. Options beyond CSG are being addressed now The Company is also

focussing on growth beyond CSG in both new geographies and segments. We

estimate TTN is currently spending around $1.5-$2.5m per annum specificallydedicated to this objective on additional business development managers,

marketing, promotion and other initiatives. We consider this a sound medium-term

strategy and believe TTN is well positioned to extend its offering to Oil and Gas

opportunities outside of CSG and other mining and infrastructure target markets.


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Background

TTN is predominantly a service provider to the CSG to LNG market in Australia and

provides mobile accommodation/camps (including transport), drilling rigs, catering servicesand equipment hire. The company was first listed on the ASX in December 2011.

Figure 1 - TTN Overview

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Atlas Drilling (23% of FY13 EBIT pre-overheads) RCH (50% of FY13 EBIT) Nektar (11% of FY13 EBIT) Hofco (16% of FY13 EBIT 6 mths ownership)

BusinessDescription Atlas Drilling was founded in 2007 as a specialist

provider of drilling services to the CSG industry.The company currently operates four rigs (3

owned, 1 rented) and provides rig and support staffas part of each contract. Customers also have thechoice of other add on services such as catering

and accommodation (sourced internally via Nektar

and RCH).

RCH was established in 2010 and acquired byTTN in September 2011. Its core business is

the provision of portable accommodation to theCSG to LNG segment and infrastructure

companies. Business model is to hire campswith ancillary support services (catering,transport etc.) either directly or by sub-

contractors

Nektar was established by TTN as an organicinitiative in April 2012 and offers catering and

camp management services to remoteaccommodation service providers. Currently

provides services to around 80% of RCH's campaccommodation contracts. Also provides stand-alone catering services to non-camp customers.

Hofco was established in 1980 and acquired inApril 2013 (effective Jan 2013). Its corebusiness is a rental provider of drillingequipment to the CSG sector. Key hire

equipment includes: drill collars and pipes,downhole motors, hydraulic drilling jars, surveyinstruments, stabilisers and fishing equipment.

Keycompetitors

EDA Energy (Ausdrill)Lucas

Savanna EnergySaxon

KJM ContractorsAustralian Portable Camps

Coal Gas CampsBonnie Rock TransportEDA Energy (Ausdrill)

Caza CateringOil Industry Catering Services

Easternwell (Transfield)Morris

SodexoESS - Compass Group

KJM Contractors

Tasman Oil ToolsDTA

Various smaller private companiesVarious larger private companies

Revenue

model

Contract term typically 6-12 monthsDrill Rig - rate per day including crew

Other services at standard rates (refer RCH foraccommodation/camp and Nektar for catering)

Contract term typically 3-18 monthsRoom rate per day

Contract term typically 3-18 monthsRate per man days catered

Contract term 1 week to 12 monthsRate per day

Keyclients

APLNGQGC

Arrow EnergyPangaea Resources

Santos

APLNGLeightonDaracon

BruhlEnergy Drilling AustraliaGeneral Trade Industries

APLNGLeightonDaracon

BruhlEnergy Drilling AustraliaGeneral Trade Industries

AGLBeach Energy

SantosSenex Energy

SmithTransfield

Keygrowth

drivers 1. No of wells required to establish and maintain

existing CSG to LNG projects

1. No of wells required to establish andmaintain existing CSG to LNG projects

2. Ability to cross sell services to CSG clients3. Ability to expand into non-CSG segments

1. No of wells required to establish and maintainexisting CSG to LNG projects

2. Ability to cross sell services to CSG clients3. Ability to expand into non-CSG segments

1. No of wells required to establish andmaintain existing CSG to LNG projects

2. Ability to cross sell services to CSG clients


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Key Earnings Drivers

Key Driver 1 Number of CSG wells required

The key target segment for TTNs services remains the upstream CSG industry which

includes the drilling, gas gathering and processing facilities that occur in the CSG

production fields. At present there are three major CSG to LNG projects in Australia which

are currently under construction with each requiring extensive upstream work including

drilling and other services. Of most relevance to TTN is the fact that the initial focus of this

work is likely to be on drilling sufficient wells to meet production deadlines such that

customer supply agreements can be satisfied. Beyond this the focus is likely to be on

having sufficient wells to maintain production levels.

Figure 2 Key CSG to LNG projects and indicative wells required

SOURCE: COMPANY DATA, ACIL TASMAN

Number of wells likely to increase rapidly in coming years andthen decline to a healthy level

Industry analysis conducted by ACIL Tasman suggests the number of wells drilled within

the CSG to LNG segment is likely to increase rapidly in the coming years from 1,000 wells

in CY13 to a peak of at least 1,500 in CY16 based only on approved projects (likely 1,900

given likely new project approvals). Further the analysis suggests that the number of wells

required to maintain production levels is expected to level out at 1,000 per annum by CY19

based only on committed projects (likely ~1,400 per annum).

Figure 3 Number of wells required Queensland CSG segment

SOURCE: COMPANY DATA, ACIL TASMAN

Project Client Capacity (Mtpa) First production Status Total CSG Wells requiredEstimated Wells Required Per Year

CY13 to End of project

QCLNG British Gas 8.5 2014Under

Construction6,200 270-520

GLNGSantos, Petronas,

Kogas etc7.8 2015

Under


APLNGOrigin, ConnocoPhilips, Sinpoec

9.0 2015Under


SALNG Shell/PetroChina 8.0 to 9.0 2016-2017 Awaiting FID 5,300 260-490

Total 23,800 1,060-2,060


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Conclusion Key Driver 1 Numbers of CSG wellsrequired a powerful macro backdrop

The size and scale of the committed CSG to LNG projects under construction together with

the potential for further approvals suggests that the number of CSG wells required to

support and then maintain production levels is likely to be material over the long-term. This

is expected to provide a favourable backdrop for TTNs services.

Key Driver 2 Breadth of TTNs CSG offering

Prior to listing the companys origins were as a specialist provider of drilling services to the

CSG industry including rig and support staff. While drilling remains a core part of the TTN

business (4 rigs currently operating) the company has extended the breadth of its offering

to include camps, catering and equipment hire through a combination of organic growth

and acquisitions.

Figure 4 - TTN History Figure 5 - TTN EBIT by Division FY14e

SOURCE: COMPANY DATA SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

RCH acquired just prior to listing and the key source of growth

The RCH camps business has been the most significant driver of profit growth for the

group over the last two years with the number of rooms increasing from 110 at acquisition

to 710 currently. The success of this business reflects the strong demand for temporary

camp hire including transport and logistics at remote CSG drilling sites. To this end, TTNs

experience in the segment via Atlas Drilling has been an important factor in extending the

offering to other services.

Figure 6 - RCH Number of Rooms Available Figure 7 - Nektar Man Days Catered

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Nektar was a logical next step and enhances the offering

The company started the Nektar catering business in April 2012 targeting remote catering

opportunities across Australia. The initial focus was on the existing CSG clients of both

Atlas Drilling and RCH and the business has started well given it is currently servicing 6

contracts (80% of RCH camps) equating to 62,294 meal days in its first year of trading.

Drill Rigs18%

Camps (inctransport &logistics)

51%

Catering12%

EquipmentHire19%

0

200

400

600

800

1000

1200

0

5000

10000

15000

20000

25000

Sept Qtr 12 Dec Qtr 12 Mar Qtr 13 Jun Qtr 13

Number of available rooms has increased from 110 as atSeptember 2011 to 710 currently. We expect this to increaseto 896 as at 30 June 2014 and 1,096 as at 30 June 2015


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Further, Nektar is also targeting permanent camps in addition to mobile camps and was

recently successful in securing its first permanent camp contract. The client has not been

disclosed by the company but we note the contract is to provide catering to a 200 room

permanent camp on a 1+1+1 year contract commencing September/October 2013. We

consider this contract an important milestone given it represents not only the companysfirst contract in the permanent space but it highlights the opportunities to sell services

beyond the existing client base. Further, we consider these types of contracts can act to

de-risk the business as they are longer-term in nature given the permanent sites.

Hofco appears a neat fit

TTN announced the acquisition of Hofco Oilfield Services in February 2013. Hofco is

essentially a rental company that provides directional drilling equipment, down-hole tools

and other equipment to the CSG segment. We consider this acquisition a positive given the

specialised nature of the equipment, the experienced management team (2 year retainers)

and the fact that it is complimentary to TTNs other CSG related services.

TTNs offering to the CSG segment now has breadth

The TTN service offering to the CSG segment now includes drill rigs, mobile camps,

transport and logistics, catering and equipment hire. This offering has been put together

over the last two years using the original drilling business as a starting point. Our analysis

of the competitive landscape suggests the company has a broader offering than any of its

direct competitors. The company is now in a stronger position to increase share of

customer wallet in the CSG segment given the range of services it can now offer. Further,

the company is now in a position to provide more complete outsourcing services to clients.

Figure 8 - TTN Competition Matrix CSG Segment

SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES

Conclusion Key Driver 2 TTN well positioned in theCSG segment given breadth of its offering

The company has taken the opportunity to leverage off its experience and relationshipswithin the CSG sector by significantly expanding the depth of its offering over the last two

years. We believe this places TTN in a strong competitive position with which to gain an

increasing share of wallet from key customers.

Drill Rigs Camps Transport and Logistics Catering Equipment Hire

Titan Energy Services EDA Energy r r r

Savanna Energy r r rLucas r r r rSaxon r r r rWDS r r r rTDC r r r r

Ensign r r r rKJM Contractors r r r

Australian Portable Camps r r rCoal Gas Camps r r

Bonnie Rock Transport r rCaza Catering r r r r

Oil Industry Catering Services r r r rEasternwell r r

Morris r r r rSodexo r r r r

ESS - Compass Group r r r rTasman Oil Tools r r r r

DTA r r r r


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Key Driver 3 Expansion beyond CSG

TTN management have made it clear that they aim to increase the companys presence in

non-CSG segments in the coming years. The company has identified a range of non-CSG

Oil and Gas target areas including the Cooper Basin and Canning Basin. Further, a range

of potential infrastructure and mining opportunities also exist in the Northern Territory and

Queensland. The common theme associated with all of these potential targets is they are

likely to require camps, transport & logistics and catering services similar those provided by

TTN.

Figure 9 - TTN growth opportunities ex CSG

SOURCE: COMPANY DATA

Investing now for the medium to long-term

Our analysis suggests TTNs strategic plans in relation to growth outside of CSG areserious given we estimate the company is currently spending around $1.5m-$2.5m per

annum dedicated to this objective. This amount comprises the wages and on-costs of four

additional business development managers, marketing, promotion and other initiatives.

The company appears to have taken the opportunity to invest now in an attempt to deliver

new revenue streams for the medium to long-term. While we are yet to see any material

tangible benefits from this expenditure and focus, we consider it a logical extension of

TTNs business and indicative of a forward looking company.

Conclusion Key Driver 3 Expansion beyond CSG alogical next step but early days

We believe TTNs plans outside of CSG represent a significant potential opportunity for thecompany and consider the decision to invest now for the medium-term a sound strategy.

On face value we can see no reason why TTNs camps, transport & storage and catering

services cannot prove competitive outside of CSG but note it is early days in this regard.


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Financials

Income Statement

In broad terms, we expect organic growth and the impact of the Hofco acquisition to

underpin strong revenue growth over the short to medium-term. This is likely to be further

enhanced by the impact of additional acquisitions given the Companys history in this

regard. This thesis underpins our key profit and loss forecasts for TTN as follows:

1. Increase in rooms capacity and catering to drive strong revenue growth

over short to medium-term We consider the Company well positioned to

continue the recent trend of strong organic growth in room capacity driven by the

level of CSG activity in Australia. Further, this is expected to drive growth in

catering services to both existing camps and drilling clients and new customers. In

totality, these factors are expected to underpin strong revenue growth over the

medium term;2. Hofco acquisition to impact full year in FY14 The Hofco acquisition was

effective 1 January 2013 hence it contributed six months worth of earnings in

FY13 (revenue $3.7m and EBIT $2.9m). We have assumed it contributes revenue

of $8m and EBIT of $5.3m in FY14 given the likely need to reinvest in the

business; and

Figure 10 - TTN Revenue Historical and Forecast Figure 11 - TTN EBITDA Historical and Forecast


3. EBITDA margins to level off post Hofco Group EBITDA margins improved

significantly in FY13 driven primarily by the mix impact of the Hofco acquisition

given it has historically delivered EBITDA margins of around 70%. We consider

this a one-off step up change in margins with marginally higher levels likely in the

coming years given the pace of revenue growth.

0

20

40

60

80

100

120

140

160

FY12 FY13e FY14e FY15e FY16e FY17e

20.0%

22.5%

25.0%

27.5%

30.0%

0

5

10

15

20

25

30

35

40

45

FY12 FY13e FY14e FY15e FY16e FY17e

EBITDA $m - LHS EBITDA margin % - RHS

Revenue Forecast CAGRFY13-FY15 = 30% pa

Acquisition of higher margin Hofco business


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Balance Sheet, Capital Expenditure and Cashflow

The TTN business could generally be categorised as one that has medium level capital

expenditure requirements assisted by the fact that RCH rooms are generally rented not

owned. The business is currently in sound financial shape with a solid balance sheet and

cashflow generating capabilities. The key points to consider in this regard include :

1. Sound balance sheet, modest gearing and excellent interest cover TTN

reported net debt of $12.4m as at 30 June 2013 (including $5.8m of deferred

consideration relating to the Hofco acquisition. We note this equated to a gearing

(net debt/equity) ratio of 23.9% as at 30 June 2013. We expect net debt to decline

to around $5m by 30 June 2014 and then move to a net cash position in FY15/16

driven primarily by increasing earnings. Further, Interest cover at the EBIT level

equated to over 12x in FY13;

2. Capital expenditure requirements currently around $10m per annum In

general terms we would regard TTN as a medium level capital intensity business

given the nature of the rig, camps and equipment hire offerings. Our estimatesassume that rig levels remain unchanged (3 owned, 1 rental) with only

maintenance capital expenditure included in our forecasts for the rig business. We

have also assumed that the current financing model employed in the camps

business remains unchanged resulting in the bulk of new rooms rented not

owned. At the same time we expect capital expenditure requirement for the Hofco

business to increase as the company looks to expand its offering across the TTN

group;

Figure 12 - TTN Gearing Figure 13 - TTN Operating Cash Realisation


3. Operating cash realisation generally around 100% despite FY13 Operating

cash realisation (OCF/NPAT +D&A) has generally been around 100% with the

exception of FY13 where the company was adversely impact by the Hofcoacquisition, late payment of material amounts due from major customers and

investment for growth. We expect this to normalise over the medium-term.

4. Attractive ROE and ROIC metrics We expect TTN to generate attractive ROE

and ROIC (pre-tax) numbers in FY14 of 23.5% and 33.4% respectively.

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-20

-15

-10

-5

0

5

10

15

FY12 FY13 FY14e FY15e FY16e

Net Debt $m - LHS Gearing % - R HS 0

5

10

15

20

25

30

0%

20%

40%

60%

80%

100%

120%

FY12 FY13 FY14e FY15e FY16e

Operating Cashflow $m - RHS

Operating Cashlow Realisation % - LHS


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Valuation

Long-term DCF valuation of $3.97

Our long-term DCF valuation of TTN equates to $3.97 per share. Major assumptions are a

post-tax WACC of 13.6% and a terminal growth rate of 2.5%.

12-month price target of $3.42 using ROIC methodology

Our 12-month price target of $3.42 has been derived utilising an ROIC based model that

looks at rolling 1-year forward earnings. This price target is derived using a rolling 1-year

forward ROIC of 34.0% (pre-tax) and a pre-tax WACC of 15.1%. This derives a rolling 1-

year forward EV/EBITDA multiple of 5.79x.

Figure 14 - TTN EV/EBITDA valuation using ROIC model

SOURCE: BELL POTTER SECURITIES ESTIMATES

ROIC pre-tax rolling 1-year fwd 34.0%

Growth Rate 2.5%WACC pre-tax 15.1%

D&A rollng 1-year fwd 6.24

EBITDA rolling 1 -year fwd 29.63

Multiple 5.79

EBITDA rolling 1-year fwd 29.63

EV 171.51

Net Cash (Debt) rolling 1-year fwd -5.52

Value Equity 165.99

No of shares 48.43

Valuation per Share 3.43


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Gus van der Heide Chief Operating Officer

Gus has more than 30 years experience in the Oil and Gas industry, much of that on

international assignment throughout Asia as well as significant time in Australia. Most of

this was with Halliburtons Baroid product line, starting in field service and progressing

through technical and operations roles to management responsibility for fluids and wastemanagement operations. Prior to this, Gus was Far East Vice President for NOV Well Site

Services based in Singapore, with responsibility for organic and geographical growth in

solids control and waste management businesses.


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Key ShareholdersFigure 15 - Top 20 shareholders

SOURCE: CAPITAL IQ

Holder No Shares %

Pie Funds Management Ltd. 5,139,080 10.61%

Gaffw ick Pty Ltd. 3,809,523 7.87%

XLX Pty Ltd 2,434,953 5.03%

Wilson HTM Investment Management Pty Ltd 1,511,393 3.12%

Haggarty, Anthony James 1,305,849 2.70%

Davies, Allan J. 1,305,849 2.70%

Plummer, Andrew Henderson 994,361 2.05%

Lujeta Pty Ltd. 960,000 1.98%

Bizzell, Stephen Grant 946,251 1.95%

BCP Alpha Management 869,450 1.80%

Zagla Pty Ltd. 862,221 1.78%

Elkington, Paul 734,548 1.52%HFTT Pty Ltd. 704,540 1.46%

Dalara Investments Pty Ltd 704,540 1.46%

Sturgess, James 684,985 1.41%

Bravic Capital Investments Pty Ltd 650,813 1.34%

Scott, Shaun Edw ard 603,817 1.25%

Keyser, Simon J. 444,399 0.92%

Seabrook, Wayne Ronald 437,315 0.90%

Ranamok Pty. Ltd. 404,761 0.84%


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Titan Energy Services (TTN)

Company Description

Titan Energy Services Limited engages in the provision of energy and infrastructure

services primarily to the coal seam gas and associated industries in Australia. It operates

through four segments: Drill Rigs, Camps, Catering, and Equipment Hire.

Investment Strategy

We rate TTN as a Buy with a 12-month target price of $3.42. We consider the company

has strong growth potential underpinned by CSG market in Australia and attractive growth

options outside of CSG. The company also generates a very high ROE, has a strong

balance sheet and has medium level capital intensity.

Valuation

Our long-term DCF valuation of TTN equates to $3.97 per share. Major assumptions are apost-tax WACC of 13.6% and a terminal growth rate of 2.5%. Our 12-month price target of

$3.42 has been derived utilising an ROIC based model that looks at rolling 1-year forward

earnings. This price target is derived using a rolling 1-year forward ROIC of 34.0% (pre-

tax) and a pre-tax WACC of 15.1%. This derives a rolling 1-year forward EV/EBITDA

multiple of 5.79x.

Risks

We believe there are five key risks to our investment thesis as follows:

Loss of key customers Despite the fact that TTN has diversified client portfolio, the

loss of a number of key customers has the potential to negatively impact the company;

Competition TTN could be adversely impacted by material market share gains and

irrational pricing behaviour of a competitor;

Material deterioration in the outlook for the Oil and Gas sector TTNs business is

heavily exposed to development in the Oil and Gas sector (particularly CSG to LNG).

Any material deterioration in the outlook for this sector over the medium-term has the

potential to adversely impact TTNs business; and

New markets A key component of the TTNs strategy over the medium to long-term is

expansion into new geographies. We consider this both a risk and an opportunity for

the company given its lack of experience in these markets.


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Titan Energy Servicesas at 25 September 2013

Recommendation Buy

Price $2.92

Target (12 months) $3.42

Table 1 - Financial summary

SOURCE: BELL POTTER SECURITIES ESTIMATES

June Year end 2012 2013 2014e 2015e 2016e Price $2.92

Profit & Loss (A$m) Recommendation Buy

Sales revenue 33.4 72.6 108.6 123.3 134.1 Diluted issued capital (m) 48.4

. . . Change n/a 117.3% 49.5% 13.6% 8.8% Market cap ($m) $141.3

EBITDA 7.4 18.9 28.4 33.3 36.9 Target Price (A$ps) $3.42Deprec. & amort. (3.5) (4.4) (6.0) (6.9) (7.8)

EBIT 3.8 14.5 22.4 26.4 29.1 June Year end 2012 2013 2014e 2015e 2016e

Interest (0.6) (1.2) (1.0) (1.0) (0.8) Valuation Ratios

Non recurring items - - - - - Core EPS (ps) 9.0 22.0 30.5 36.2 40.4

Pre-tax profit 3.3 13.3 21.4 25.4 28.4 . . . % change n/a 143.6% 38.8% 18.7% 11.8%

Tax expense (1.0) (4.2) (6.6) (7.9) (8.8) PE (x) 32.4 13.3 9.6 8.1 7.2

. . . tax rate 30.4% 31.7% 31.0% 31.0% 31.0% EV/EBITDA (x) 20.9 8.1 5.4 4.6 4.2

Minorities - - - - - EV/EBIT (x) 40.0 10.6 6.9 5.8 5.3

Net Profit Reported 2.3 9.1 14.8 17.5 19.6

NRI's post tax - - - - - NTA ($ps) 0.79 0.76 0.76 1.03 1.33

Net Profit pre-NRI's 2.3 9.1 14.8 17.5 19.6 P/NTA (x) 3.7 3.9 3.9 2.8 2.2

Normalisation adjustments - - - - - Book Value ($ps) 0.52 1.07 1.30 1.57 1.87

Net Profit Normalised 2.3 9.1 14.8 17.5 19.6 Price/ Book 5.64 2.73 2.25 1.86 1.56

DPS (ps) 2.0 5.5 7.6 9.0 10.1

Cashflow (A$m) . . . % pay-out 22.2% 25.0% 25.0% 25.0% 25.0%

Reconciliation Franking (%) 100.0% 100.0% 100.0% 100.0% 100.0%

Net Profit 2.3 9.1 14.8 17.5 19.6 Yield (%) 0.7% 1.9% 2.6% 3.1% 3.5%

Deprec. & amort. 3.5 4.4 6.0 6.9 7.8

Change in working capital (0.1) (4.7) (2.1) (2.6) 1.1 Performance Ratios

Other 0.7 0.6 - - - EBITDA/sales (%) 22.0% 26.0% 26.2% 27.0% 27.5%

Net operating cashflow 6.5 9.3 18.7 21.9 28.4 EBITA/sales (%) 11.5% 20.0% 20.6% 21.4% 21.7%

Investing Cashflow OCF realisation (%) 112% 69% 90% 90% 104%

Capex (6.3) (9.7) (10.0) (10.0) (10.0) FCF realisation (%) 257% 94% 121% 119% 137%

Payment for businesses (14.7) (15.1) (5.8) - - ROE (%) 9.1% 17.6% 23.5% 23.1% 21.6%

Other 0.1 0.4 - - - ROIC (%) n/a 29.8% 33.4% 36.2% 38.1%

Net investing cash flow (20.9) (24.4) (15.8) (10.0) (10.0) Asset Turn (years) 2.1 4.3 4.7 4.8 4.7

Financing Cashflow Capex/Depn (x) 1.8 2.2 1.7 1.5 1.3

Issue of shares 11.1 17.7 - - - EBIT Interest cover (x) 6.6 12.3 22.3 25.5 38.6

Buy backs - - - - - Net debt/EBITDA 1.1 0.7 0.3 0.0 -0.4

Dividends paid - (1.2) (3.7) (4.4) (4.9) Net debt/equity (%) 32.0% 23.9% 11.7% -0.2% -15.1%

Debt 4.8 3.8 - - -

Others - - - - - DivisionalNet financing cash flow 15.9 20.3 (3.7) (4.4) (4.9) Revenue $m

Effects of exchange rate - - - - - Drilling 24.3 35.4 42.8 44.1 45.5

Net change in cash held 1.4 5.2 (0.8) 7.5 13.5 Camps 9.1 33.9 54.2 65.7 73.8

Catering (external only) 0.0 0.0 3.5 3.6 3.7

Balance Sheet (A$m) Equipment Hire 0.0 3.4 8.1 9.9 11.1

Cash assets 1.4 6.6 5.9 13.3 26.9 Adjustment 0.0 0.0 0.0 0.0 0.0

Receivables 6.5 14.6 16.3 21.0 20.1 Total 33.4 72.7 108.6 123.3 134.1

Inventories 0.4 1.9 1.9 1.9 1.9

Other 0.1 0.3 0.3 0.3 0.3 EBIT $m

Total current assets 8.5 23.5 24.4 36.6 49.2 Drilling 2.8 4.2 5.1 5.4 5.5

Plant and equipment 28.5 39.6 43.6 46.7 48.9 Camps (exc internal catering) 2.8 9.0 14.2 17.4 19.6

Intangible assets 5.3 20.4 26.2 26.2 26.2 Catering 0.0 1.9 3.4 4.1 4.6

Other / financial assets 0.0 0.0 0.0 0.0 0.0 Equipment Hire 0.0 2.8 5.3 6.6 7.4

Deferred tax assets 0.7 1.5 1.5 1.5 1.5 Corporate -1.8 -3.4 -5.7 -7.0 -7.9

Total non-current assets 34.5 61.5 71.3 74.4 76.6 Adjustment 0.0 0.0 0.0 0.0 0.0

Total assets 43.0 85.0 95.7 111.0 125.9 Total 3.8 14.5 22.4 26.4 29.1Short term debt 2.1 3.6 3.6 3.6 3.6

Payables 7.4 15.3 13.5 15.3 16.6 Half yearly 1H12 2H12 1H13 2H13 1H14e

Current tax liabilities 0.8 3.3 3.3 3.3 3.3 Sales revenue 14.9 18.5 29.6 43.0 50.8

Provisions 0.1 0.5 0.5 0.5 0.5 . . . Change vs pcp n/a n/a 98.2% 132.8% 71.5%

Other liabilities 0.1 0.7 2.2 2.5 1.3 EBITDA 2.4 5.0 6.5 12.4 13.3

Total current liabilities 10.5 23.4 23.0 25.2 25.4 Deprec. & amort. (1.7) (1.9) (2.2) (2.2) (3.0)

Long term debt 7.4 9.6 9.6 9.6 9.6 EBIT 0.7 3.1 4.3 10.2 10.3

Deferred Tax Liability 0.0 0.0 0.0 0.0 0.0 Interest expense (0.2) (0.3) (0.9) (0.3) (0.5)

Other 0.0 0.2 0.2 0.2 0.2 Non recurring items (NRI's) - - - - -

Total non-current liabilities 7.4 9.8 9.8 9.8 9.8 Pre-tax profit 0.4 2.8 3.3 10.0 9.8

Total liabilities 17.9 33.2 32.8 35.0 35.2 Tax expense (0.2) (0.8) (1.0) (3.2) (3.3)

Net assets 25.1 51.8 62.9 76.0 90.7 . . . tax rate 35.0% 29.7% 30.5% 32.1% 33.9%

Contributed equity 22.6 40.8 40.8 40.8 40.8 Minorities - - - - -

Reserves & outside equity 0.3 0.8 0.8 0.8 0.8 Net Profit Reported 0.3 2.0 2.3 6.8 6.5

Retained earnings 2.2 10.2 21.2 34.4 49.1 NRI's post tax - - - - -

Total equity 25.1 51.8 62.9 76.0 90.7 Net Profit pre-NRI's 0.3 2.0 2.3 6.8 6.5

Norm adj post tax - - - - -

Net debt/(cash) $m 8.0 12.4 7.3 -0.1 -13.7 Net Profit Normalised 0.3 2.0 2.3 6.8 6.5


17/17


Bell Potter Securities LimitedACN 25 006 390 7721

Level 38, Aurora Place88 Phillip Street, Sydney 2000

Telephone+61 2 9255 7200www.bellpotter.com.au

Recommendation structure

Buy: Expect >15% total return on a

12 month view. For stocks regarded

as Speculative a return of >30% isexpected.

Hold:Expect total return between -5%

and 15% on a 12 month view

Sell:Expect

bell potter - ttn

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