Weathering the Storm (Part 2)
Nic Dinham
FY23: Master Drilling weathered the 2023 commodity storm largely unscathed, thanks to its regional and commodity diversification as well as its successful investments outside its core Raise Boring (RB) business. As a result, basic earnings fell only by 3% yoy, to USD13.6cps.
FY23 RB Dynamics: MDI’s RB business was severely impacted by events in South America during 1H23 and then in the Africa segment in 2H23. However, its successful European and Indian operations helped offset these challenges and reduced the RB’s GP decline to 15% yoy.
FY23 Other Dynamics; MDI’s investment in the A&R Group has proven to be a commercial success and generated $12m of GP line in the first full year of its consolidation. A more surprising turnaround came from Master Drilling Exploration (MDX) which generated a GP of $4m after several years of losses.
FY24E RB Dynamics: We expect the RB business to stabilise its revenues and improve its GPs despite ongoing challenges and downsizing in the Americas. The Rest of the World segment is doing exceptionally well, while the Africa segment should benefit from more work for larger machines.
FY24E Other Dynamics: Several of MDI’s businesses should contribute to improved profits in FY24E, including the Hall Core JV and the A&R Group’s continued 20% p.a. revenue growth.
FY24E Earnings: We expect MDI to be able to improve its basic earnings of USD15.6cps, up 15% yoy. The forecast is at risk of impairments arising from the non-utilisation of the MTB1, in which case a focus on our headline earnings forecast of ZAR300cps may be a more realistic performance metric.
Trimming the Sails: Management no longer intend buying RB businesses with strong regional footprints nor merging MDX and the Hall Core JV. The only transaction still in consideration is the acquisition of another 25% of the A&R Group, which would underpin a FY25E earnings forecast of USD17.6cps.
Organic Growth: MDI’s focus is now on organically growing the RB business. Several large machines were built in FY23 at a cost of $25m, and several more are under construction, which should help drive FY25E earnings growth. Improved fleet utilisation rates are key to improving the company’s ROCE as well as earnings.
Summary: MDI’s prospects for earnings growth are improving. These earnings are still sensitive to exchange rate movements, global cost increases as well as impairments and changes in mine ownerships – but the worst of the commodity storm may be over.
Valuation: Our base case value for MDI is R12.58cps (previously R15.00cps). Our speculative scenario values MDI at R14.14cps (previously R15.44cps) and assumes that the Hall Core JV wins the Kolomela contract and that the MTB1 is put back into commercial operation in the FY26E.
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