A little over a year ago, I wrote about how I expected Master Drilling Group (MDI) to report strong results (Expect the Lights to be Shot Out). This wasn’t anything clever from my side. Rather it was noting that the Group’s key variables were moving in their favour: Order Book (a leading indicator for future revenue) was growing strongly and Utilization Rates on their fleet (a leading indicator for future margins) was rising strongly.
If your future revenue is likely to be higher and your future margins are likely to be better, your future profits are likely to grow strongly.
Little surprise, but last week Master Drilling reported strong FY 22 results:
- USD-revenues grew +32% y/y,
- USD Headline earnings per share (HEPS) grew +10% y/y and HEPS in Rands grew even more to +16% y/y, &
- While cash generation was a bit weak (working capital came through late and should reflect in FY 23E), the Group hiked its dividend by a whopping 46% y/y.
And the Group’s “key variables” as noted above? Not just has the committed Order Book, Pipeline and Utilization Rates recovered quickly from H1:20’s (January 2020 till June 2020) COVID/hard lockdowns around the world, but these are currently higher than pre-COVID levels (and with little signs of slowly down either).
Much like before, this implies good forward results are likely to be reported.
That said, I will caution that practicalities around the fleet dictate that Utilization Rates will probably never reach 100%. Jobs finish and rigs need to be moved, thus dropping their utilization to below 100%. Thus, Utilization is likely to toppish in these results and, at best, should remain flat.
But when capacity and availability of rigs is the bottleneck, Master Drilling can start to push the pricing of the rigs. If the mines need to compete amongst themselves for drilling services, the owner of the fleet wins. This “pricing” lever (Master Drilling calls it “ARPOR” or “Average monthly Revenue Per Operating Rig”) is another variable that we are only just starting to see play out this cycle and may have a larger impact going forward at these toppish Utilization Rates.
Despite all of this, Master Drilling’s share price has only recovered back to more or less the same as pre-COVID levels. In fact, we must compare like-with-like and Master Drilling’s order book and pipeline are reported in USD’s and, thus, we should compare this versus its share in USD’s (not ZARs):
Terrifyingly, despite Rand deprecation against the USD (moving from R13-odds to the USD to its current c.R17~18 to the USD) and its USD-based Order Book, Pipeline and Utilizations all moving higher than pre-COVID levels, Master Drilling’s share price remains flat.
Everything is shooting the lights out at Master Drilling, except the share price. At a 5.9x Price Earnings, paying dividends, with a nearly ungeared balance sheet, and global cutting-edge dominance in an increasingly important service as resources get scarcer and deeper underground, Master Drilling remains an arguably undervalued global gem hidden away on the JSE.