MTB dream deferred, new horizons
FY22 Results: Master Drilling’s (MD) Raise Boring (RB) and Support Services improved their GP contribution by 24%. The two segments now account for 94% of the group’s total GP of $64m. GP generation improved markedly in H2.
RB dynamics FY22: The industry is moving towards larger machines which offer better value while more capital projects requiring ventilation shafts are being commissioned by the mining industry. MD’s fleet of larger machines is now fully utilised and several more are being built. Small machines that have no specialised function are now in oversupply.
MD markets: Approximately 50% of Master Drilling’s RB GPs are ‘African’ with South Africa as the key market within the region.
MTB setback: The Mobile Tunnel Borer (MTB) was withdrawn from service as a result of flooding fears and slow advance rates. This will defer the possibility of a large MTB fleet build up for several years. The machine achieved several demanding KPIs and will probably be redeployed in the next 18 months.
MD growth refocus: The delay of new tech as a potential growth catalyst, as well as stronger markets, has refocused MD on supporting its RB business with investment in new machines as well as M&A directed to acquiring offshore RB operators. We expect up to $35m to be spent on these investments in FY23.
Other growth options: MD may also elect to acquire larger stakes in the A&R Group and the Hall-Core JV. Either of these options will improve MD’s bottom line with the balance sheet being the limiting factor. The company is also hopeful that the Slim Rigs business will return to profitability in FY23E.
Slow EPS growth: Despite the good news from its core business, strong GP growth and earnings of USD8.9cps in 2022H1, MD’s full-year’s earnings grew a disappointing 8% y-o-y to USD14.2cps. This is attributed to negative impairments and adjustments as well as losses from Master Drilling Exploration. Cash flows reduced sharply as a result of large increases in working capital.
FY23E and beyond: Despite the loss of the MTB’s contribution to profits, we expect MD to generate USD17.7cps in FY23E. This should be supported by strong fundamentals in the RB business, more rigs as well as base effects from the acquisition of 51% of the A&R Group flowing into the accounts. Further support from MDE’s profits and the Hall-Core JV are also expected.
Valuation: Our base case forecasts earnings growing by 10% p.a. and a DCF valuation of R16.06/s. Our speculative case, which includes additional investments in new and existing JVs/companies, could grow earnings by 15% p.a. and improve its valuation to R16.69/s from (R15.35-R16.05).
Valuation Method/Risks: We value MD using a DCF using a 20% discount rate. We assume the commodity cycle will provide the RB business with real growth opportunities for the next three years. MDs profits are also sensitive to our R18/USD exchange rate; a weaker rand will reduce MD’s South African reported $ profits but boost global GP margins as well as DCF valuations.