OLD ARTICLE – Original posted on March 22, 2018
I have written about Master Drilling (MDI) previously and I refer you back to these articles for some of the narrative:
You will notice a consistent theme: I like them.
The Group recently put out some soft results, mostly due to lower utilisation and a much stronger ZAR. See the full results presentation here.
While I do think that the next five years will be better for Master Drilling than the previous five has been (the commodity cycle appears to be turning nicely), it is always worth standing back and checking if you are crazy.
I have built some comparative graphs below for Master Drilling relative to some listed comparatives. Now, Master Drilling is actually pretty much one-of-a-kind (which is part of its attraction). That said, this does not mean that other suppliers into the mining industry and other drilling providers may attract multiples and achieve financial metrics that in some way give us context for Master Drilling’s true fair value…
Hence, what lies below is relative to a handful of other global listed companies in either mining services/supply and/or (predominantly) oil & gas drilling, and some large indices (with mining, construction and related machinery embedded as very large parts of them).
Yes, these comparatives are not perfect. No, there are no perfect comparatives out there.
Either way, I think you’ll agree that Master Drilling looks to be both cheaper and more profitable than other listed global comparatives (almost without exception). Even without any material gearing on its balance sheet, Master Drilling earns a higher Return on Equity (ROE) and Return on Capital (ROC) than anyone else I used, yet it trades at a material discount to any of these other stocks/indices in the market.
Why?
Liquidity, probably, as MDI is a much smaller and less liquid counter than most.
But the discount is quite material in some cases. So I think I am justified to say that at least a large portion of this discount to comparables is simply not justified and offers one a potential opportunity.
Click on the graphs to enlarge…
Post-note: As noted by Mark Tobin on Twitter, here are some more niche Australian comparatives that are also worth looking at as well. Interestingly, almost across the board, my above thesis remains the same when compared to these players:
- Swick Mining Services: Currently loss-making, so not a good comparative other than to demonstrate Master Drilling’s quality.
- Ausdrill Ltd: Price Earnings of 17.2x making Master Drillings’ 8x PE look cheap. Ausdrill is also earning a 7.8% ROE and a 4.8% ROI, both inferior to Master Drilling. Other than company size (Ausdrilling c.4x larger market cap than MDI, but it also has a 2x higher multiple, so this is misleading too), I can see no reason Ausdrilling should attract a superior multiple over MDI.
- Imdex Ltd: PE of 20.3x, or more than double of Master Drillings’ multiple. The Group does have a 14.3% ROE, which is higher than Master Drillings’. This is backed by a higher ROA and ROI than Master Drillings’ current ratios, albeit if you take Imdex’s 5 year average on these ratios and compare it, Master Drilling looks superior. Hence, Imdex has obviously had a good year, but is it worth double MDI’s rating in the market?
Hence, I believe that these add further depth to my relatives noted above. Interestingly, they do not disagree with my conclusion. In fact, I think they add weight to my view that Master Drilling is undervalued. Thanks, Mark, some fascinating comparatives there!