Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 75

Deep dives make better investment decisions

For those ASX-listed companies with a 30 June balance date, investors will have two or three opportunities over the next few months to perform a deep dive behind the words and phrases within each company’s releases. These include the Preliminary Final Report (Appendix 4E), the Annual Report and the Chairman and CEO addresses at the Annual General Meeting.

Commentary from companies acquiring or divesting businesses or interest in businesses need extra attention in terms of the true ‘like for like’ comparison, often due to the objective of painting a positive outlook. It is only through deep analysis that investors can make more educated investment decisions.

For example, if we backtrack two years to August 2012, many Australian resource service companies were recording record revenue, profits and margins. Large contracts and acquisitions were being announced and the outlook was buoyant.

To illustrate the deep dive approach required, I will use the following ASX announcements from Ausdrill Limited (ASX: ASL) with the objective that investors may learn from this experience.

On 28 August 2012, Ausdrill announced the “strategically important acquisition” of Best Tractor Parts Group (BTP) for $165 million, on a debt-free basis, to be completed on or around 31 October 2012. In the year to June 2012, BTP generated revenue of $176 million and EBITDA of $50 million (unaudited).

“Subject to completion occurring, all profit generated by BTP from 1 July 2012 will remain within BTP (and the Ausdrill group will therefore become entitled to the benefit of such profit from completion).”

On 29 August 2012, Ausdrill released four documents: its Appendix 4E, a Media Release on the 2011/12 Results, the Annual Report to shareholders and a Results Presentation. The electronic version of these reports totalled 191 pages.

The results for the year to 30 June 2012 were at record levels with revenue up 27% to $1.06 billion, EBITDA up 48% to $288 million and Net Profit After Tax up 53% to $112 million.

 “Based on current trading conditions, and excluding the effects of the Best Tractor Parts acquisition, the Board is confident that continued growth can be achieved in 2012/13 with a targeted growth rate of 15% in revenues whilst maintaining similar operating margins.”  The final sentence of the media release touched on “Targeted areas for expansion over and above growth in core businesses.”

On one hand, things could not have been more positive. In addition to the record earnings and even better outlook for 2012/13, Ausdrill had recently welcomed back a senior executive to take up the newly-made Chief Operating Officer - African Operations position, and had signed a US$540 million five year contract in Mali, West Africa with Resolute Mining Limited.

The consensus immediately added 15% to the just-released 2011/12 revenue and EBITDA numbers and then added at least two-thirds of the historic numbers from the proposed BTP acquisition (given it was to be completed on or around 31 October 2012) to arrive at a FY13 forecast for EBITDA of $364 million on revenue of nearly $1.34 billion.

On the other hand, Ausdrill did cast a warning on page 3 of the 132 page electronic Annual Report for the year ended 30 June 2012: “As we look ahead there are conflicting signals in terms of the outlook for the mining industry. In Australia, junior exploration companies are having difficulty raising funds. As a consequence the demand for exploration drilling has reduced. However, as a result of our focus on production-related services under medium to long term contracts, combined with our strategy of working for major mining houses, the effect on the company should be minimal.”

During October 2012, Ausdrill had refinanced its debt and signed a new three year dual currency, syndicated facility for a total of $550 million, as well as completing the BTP acquisition.

By late November 2012, investors and potential investors could view two releases to the ASX: a Market Update, dated 22 November 2012 and the Chairman’s address from the Annual General Meeting, dated 23 November 2012.

 “Revenue guidance for the 2013 financial year now includes BTP and is revised to a 20% increase from 2012.”

Deep dive: this equates to $1.27 billion ($1.06 billion X 1.2), or around $70 million or 5% below the consensus forecast three months earlier (of $1.34 billion).

 “The BTP business will be consolidated into Ausdrill’s financials from 1 November 2012 and is expected to account for 10% of consolidated revenues.”

Deep dive: Assume BTP accounts for $130 million of the lower $1.27 billion revenue forecast for 2012/13. Then the traditional business would contribute $1.14 billion. This is a 7.5% boost to the 2011/12 revenue figure of $1.06 billion, and compares with the targeted growth rate three months earlier of 15%.

From the Market Update, dated 22 November 2012: “We also anticipate that the 2013 financial year results will include a number of one-off costs, amounting to approximately $15 million before tax”…”The overall results will be skewed to the second half of the financial year as the first half is expected to be impacted by prevailing market conditions.” Three months earlier we had read the phrase: “whilst maintaining similar operating margins.”

Through a more careful analysis, investors could infer that the outlook for the company may not be a rosy as once thought. This is not to say that they should make immediate changes to their invested positions, but a rare signal that required further scrutiny and analysis was now publicly available.

The best part of this process is that the majority of investors will not undertake this higher level of due diligence. Whilst more work may be required, more information will result, and more information tends to create better investment decisions and likewise better portfolio returns.

So without being a Chartered Accountant or a Chartered Financial Analyst, all investors have the ability to deep dive into the words and statements of the companies in their portfolio. It’s a simple trick but it can vastly improve performance over the long term.

Ausdrill (ASL) Share Price from Start of 2012



 Source: Google Finance. 'D' and an amount signify payment of a dividend.


David Buckland is the Chief Executive Officer of Montgomery Investment Management. Montgomery Investment Management did not own Ausdrill during the periods mentioned within this article, and has not owned it since.


Leave a Comment:



Where do stockmarket returns come from over time?

Reporting season was not all doom and gloom


Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates


'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.


Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.


Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.


Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.