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Credit Suisse On Fairmount Santrol: 'No Rose Without A Thorn'

FMSA Holdings NYSE:FMSA, Halliburton Company NYSE:HAL - Credit Suisse On Fairmount Santrol: 'No Rose Without A Thorn'

Credit Suisse has started coverage on Fairmount Santrol Holdings Inc FMSA 4.58% with a Neutral rating and $7 target price, as it is concerned about debt burden and continued lower demand for resin coated sand, of which Fairmount is the largest supplier.

The brokerage acknowledged Fairmount is poised to take advantage of the pending proppant market recovery, leading to revenue and margin expansion. Fairmount "has the largest low-cost mine of its public competitors, exposure to the high-end and low-end of the proppant market, access to 40-plus transload facilities and is positioned on Class I railroads," according to analyst James Wicklund.

"We expect proppant demand to increase 48.6 percent/27.1 percent YoY in 2017/2018," Wicklund wrote in a note.

On the flip side, the analyst is most concerned on $1.2 billion in principal payments due between now and 2019 despite there being time to adjust the capital structure.

"The almost inevitable dilution and of what magnitude, to the current ~$1.5 billion equity market capitalization, keeps us on the sidelines with a Neutral rating," Wicklund noted.

Wicklund continued that there is simply less demand for Fairmount's tempered resin-coated proppant in the short to medium term. In addition, the company has a very large overhang of rail cars. These costs will slowly alleviate, but they represent a near-term profitability headwind.

The analyst is also cautious over the company's high dependence on its top two customers (Halliburton Company HAL 0.09% and FTS International), which accounted for 43 percent of revenues in 2015.

In addition, the debt burden prevents the company from making an acquisition in the last-mile logistics, which could be the next frontier for innovation in the space.

Meanwhile, the analyst expects volumes to continue to remain flat over the next few years and for product mix to be seasonal.

Shares have been trading higher than the price target and closed Tuesday's trading at $7.97. Shortly after Wednesday's open, Fairmount was seen down 2.89 percent on the day at $7.74, still ahead of the price target.

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Sep 2016Credit SuisseInitiates Coverage onNeutral
Aug 2016CitigroupMaintainsBuy
Aug 2016BarclaysInitiates Coverage onEqual-weight

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