The last time I wrote about Masterdrilling (MDI) two years ago, I was impressed with its earnings growth. It’s last annual results, published two weeks ago, showed flat earnings and dividend at 142c/share and 26c/share respectively. However, as MDI’s share price has declined together with all other shares in the South African small cap sector, it remains on a very cheap PE of 7.4 and a dividend yield of around 2.5%.
The company has continued to grow internationally, with presence on most continents and in major mining markets. In the 2018 financial year, the investment in growth initiatives included partnering with Italian construction company on tunnel boring, acquiring the rest of Scandinavian raiseboring company Bergteamet, acquisition of the Atlantis Group and further development of the vertical shaft boring machine (a huge potential industry game changer). The continued diversification across geographies, whilst the bulk of the team remains South Africa based, ensures that this company is an excellent Rand hedge.
The acquisition of the Atlantis group is a case study into how this company conducts its business:
- The acquisition was for R107m, meaning that it was small enough to ensure that cash reserves can be used
- It was at 4 times profit, at the bottom of the market, it should therefore be significantly earnings accretive for MDI shareholders
- It strengthens the presence in key growing mining markets India and Zambia as well as the established market of Zambia
- The assets, several large raiseboring machines, were acquired at below replacement cost and have now taken the machines in the fleet to 149, no other competitor owns more than 50 machines
Due to the size of MDI’s fleet, it has established itself as a key partner to major mining companies. For example, Codelco, the world’s largest copper miner is using them for their major expansions in Chile and Byrnecut, Australia’s largest contract miner, is leasing one of their machines to execute a contract. It is therefore not surprising that they see their orderbook and pipeline at a healthy US$578m. Assuming that this work is executed at their current margin of +/- 30%, implies that they have close to $200m profits secured. This is almost double the current market cap of the company.
MDI has been caught in the general small cap depression that has plagued shares on the JSE in the last two years. However, the business is truly global, and is guaranteed to profit from continued capital investment in mining. Shares are trading at a 35% discount to NAV, earnings are in US$ and the cash conversion is excellent. The company is cautiously optimistic and provides the following gems in its outlook and prospects section:
“We are experiencing strong demand with increased enquiries across the various regions and commodities and expect this to continue.”
“Various opportunities in first world countries such as Australia, Canada and USA are coming to fruition and are expected to increase the Group’s footprint across the world in the near future.”
“The upswing in the commodity cycle has had a positive impact … Although not immediately reflecting in our numbers, we do expect a positive impact on our revenue during the next reporting period.”