Major Drilling Group International Inc T.MDI

TD

[retiredcf]

Have a $14.50 target. GLTA

Major Drilling Group International Inc.

(MDI-T) C$8.77

Q4 Misses on Weather & Corporate Costs; Outlook Very Strong Event

MDI reported Q4/F23 (ending April 30) EBITDA of $37.2mm, 7.5% below TD's $40.3mm estimate (consensus: $42.2mm), reflecting lower revenues and higher- than-expected corporate costs (EBITDA margins: 20.1%, TD: 21.1%).

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Impact: MIXED

Q4/F23 results were weaker than expected, primarily reflecting other corporate costs (higher incentive compensation and increased allowance for doubtful accounts) and weather impacts on revenue. However, we believe the weaker results are offset by management's commentary that activity levels returned to robust levels by the end of the quarter and that the outlook for fiscal 2024 remains extremely positive.

• Revenue decreased 2.6% y/y to $185.0mm (2.9% below TD). North America results were affected by weather in Nevada and northern Canada in February, which drove a majority of the 8.6% y/y decline. South/Central America declined 5.5% y/y, reflecting a significant slowdown in junior activity in Mexico due to lack of available financing and uncertainty over new mining legislation. Australasia & Africa was a highlight (+20.9% y/y), driven by strong demand for specialized services in Australia and new energy work in Mongolia.

• Gross margins were effectively flat y/y at 30.8%, reflecting a continued healthy pricing environment and the ability to pass through ongoing inflationary pressure.

• FCF: $13.4mm pre-w/c (-$16.4mm after w/c), below TD's $15.8mm estimate, primarily reflecting the EBITDA miss. In Q4/F23, MDI spent $16.6mm (TD: $18.5mm), with five new rigs acquired (seven older rigs disposed). Total rig count: 600.

• Net cash (excluding leases) decreased $14.8mm q/q to $59.4mm, primarily reflecting W/C investments to support the seasonal increase in activity levels (cash: $94.4mm, debt: $20.0mm, McKay contingent consideration: $15.1mm).

• Outlook: Management's 2024 outlook is underpinned by increased exploration budgets by its senior gold customers and growing demand for copper/battery metals related to the broader electrification transition. This is mitigating pockets of softer demand from junior gold customers as capital markets' fundraising remains challenging. To support its strong outlook, capex may approach $80mm this year; this exceeds our current estimate of $65mm, but appears to focus on adding more specialized/underground rigs in MDI's busiest markets, which we presume would provide an effectively immediate contribution to results.