OLD ARTICLE – Original posted on August 26, 2016
Previously I wrote the following article on Master Drilling (Master Drilling: Unknown Gem). I will not rewrite the investment case that I noted in that article for Master Drilling as a world-class, niche industrial technology play with global, growing scale and sophistication.
Pretty much all of that investment case remains relevant today.
In fact, earlier this week, Master Drilling (MDI) put out a trading statement indicating that its Rand-based HEPS is expected to grow by 25% to 35% for H1:16.
Given the Rand’s weakness against the USD, though, the USD-based HEPS are expected to be pretty much flat (-5% y/y to +5% y/y change).
About a third of the Group’s revenues are in Rand’s and about half of the Group’s revenues are not in USD, so the USD’s strength against other currencies implies that the flat USD-based HEPS performance from Master Drilling is not necessarily due any volume, activity or order book decline.
We will see the greater detail, though, when Master Drilling releases their detailed results on or about 6 September 2016.
That said, even at a USD-based growth rate of 5% y/y, Master Drilling’s current, ridiculously low Price Earnings (PE) of 7.4x is pretty cheap, especially when viewed as a South African investor experiencing a c.30% y/y Rand-based HEPS growth…
But why is Master Drilling so cheap? Why hasn’t its share price moved despite being such a great company with good results?
Well, arguments about the mining cycle and commodity capex cycle’s could be made. Arguments about risk and many other details too. But, even the most basic valuation measures with conservative assumptions are all likely to indicate that Master Drilling is dirt cheap at 1300cps.
So why is it cheap?
Simple: No one knows (much) about it.
While Master Drilling’s management are superb and know their business and industry inside-out, they made a mistake that a number of other management teams have done: they hired a Public Relations (PR) firm to run their Investors Relations (IR).
I have nothing against PR, but PR deals with the media, journalists and press releases and so on… IR is a very different field with very different players and a very different approach. They are not the same thing.
Hence, what happened a year or two ago: I was waiting for an invite to Master Drilling’s results presentation, but never received one. Suddenly Master Drilling’s results came out on SENS, so I checked their website and they had a results presentation and details about their presentation. I rushed off to the results presentation only to find that I was one of only about three people from the stock market there and all the rest of the attendees were journalists.
Now, journalists should have been there, so that was great. But obviously the PR firm had forgotten/been unaware/was clueless as to the fact that there are literally hundreds of analysts, brokers and fund managers that exist in the stock market and come to these results presentations.
Journalists may write an article once in a while on Master Drilling, but it is this collection of stock market participants who buy and sell shares every single trading day of the year. And, thus, they are quite a key bunch of people to get to a results presentation, especially when you are a great company with great results like Master Drilling.
I.e. Why wouldn’t you want these investors, analysts, brokers and fund managers at your results presentation, if you were Master Drilling?
Then there is the fact that Master Drilling’s FY 15 results were released on SENS without commentary. FY 15 was another brilliant year for the Group, but the SENS is only really a collection of numbers and no commentary by management about the Group and its prospects.
Given that the entire market (irrespective of who is on or not on a mailing list) gets to see the SENS, this is a golden opportunity for investor communication that has been lost by Master Drilling.
A good IR firm would never have let these results slip by without screaming Master Drilling’s incredible story from the rooftops and writing up a long essay in the commentary on the SENS announcement.
What exactly did the PR firm do here, I wonder?
Once again, I am not saying PR does not have its place. What I am saying is that IR is vastly different from PR and most listed firms would do better to get their IR from a specialized IR firm. And, thus, I arrive at Master Drilling’s great mistake: it has remained quiet. No matter how incredible a company Master Drilling is (and it really is an incredible company) until the market actually knows that they exist, the share price is unlikely to move much.