TSX:MDI - Post Discussion
Post by
retiredcf on Jun 08, 2022 10:48am
RBC Upgrade
Their upside scenario target is also raised to $19.00. GLTA
Outperform
TSX: MDI; CAD 10.58
Price Target CAD 15.00 ↑ 14.00
Major Drilling Group
FQ4 results show continued acceleration in the drilling market
Our view: We expect a positive reaction from MDI shares to FQ4 results which came in above our estimates and consensus. The stronger than expected results were driven by higher top line revenue and slightly better margins than we expected. MDI generated $26M in FCF (excluding impacts from WC) in the quarter compared with our estimate of $19M. Drilling activity continues to ramp up and we reiterate our Outperform rating and increase our price target to $15 from $14 on higher earnings estimates in F2023.
Key points:
• Financial results above our expectations: MDI reported EPS of $0.27, above our estimate of $0.21 and consensus of $0.18. EBITDA was $41M also above our estimate of $32M and consensus of $30M. Top line revenue was ahead of our estimates due to increased activity in all regions MDI operates in.
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Outlook: MDI management noted they continue to see increased inquiries from all categories of customers with most seniors expected to at least replicate F2022 drilling. Based on strong commodity prices, we forecast global exploration spending growing to $16.5B in 2022 from $11.2B in 2021, which is well up from $9.3B in 2019, but remains below the prior peak of $20.5B in 2012. Based on our revised global exploration spending, which is based on our commodity price forecasts, our earnings estimates increased for MDI bringing up our price target to $15.
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Margins in focus: With a scarcity of skilled drillers and companies keen to explore, it has allowed MDI to increase prices to largely offset cost inflation, although labour availability remains a headwind for the drillers. Gross profit margins were up to 28% in F2022 after averaging 24% in F2019-F2021. In 2010-2011, margins averaged 25% before jumping to 32% in 2012-2013 during the peak years of the prior cycle.
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$15 price target: We continue to use 8.0x our F2023 EBITDA estimate to derive our $15 price target and this multiple is inline with the historical average. MDI is currently trading at 5.7x our F2023 estimate. As a downside case, if margins were 25% (vs. our 29% base case) and global exploration spending was flat vs. 2021, we think MDI would be trading at 12.8x with an implied price of $7.00 at 8.0x. In an upside case where exploration spending and margins are better than expected, we could see EBITDA 30% above our estimates which would imply a $19 share price at an 8.0x multiple (see page 3).
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Capex and balance sheet update: Capital expenditures were $15M in FQ4. MDI added 7 rigs and disposed of 4 rigs, bringing the total rig count to 603, up from 600 at FQ3-end. The company ended FQ4 with $71M in cash, down from $78M as of FQ3 (lower cash was a result of a negative $36M impact from WC as the company continues to ramp up operations). LT-debt at the end of the quarter was $50M
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