Beacon Securities Report and upgraded $2.90 TargetGeodrill Limited (GEO-T) Raising Target Price on Strong Outlook; Diversification Strategy Supports Long-Term Valuation Rerating March 8, 2021 Ahmad Shaath, CFA, MBA (416) 507-3964 ashaath@beaconsecurities.ca
Record Q4 Revenues. GEO reported Q4/FY20 results highlighted by record revenue and the second-highest EBITDA for a Q4. Total revenue for Q4/FY20 was $24.7 million (+44% y/y), ahead of our $22.4 million estimate and consensus $20.8 million. Adjusted EBITDA was $6.0 million, ahead of our $5.8 million forecast and consensus $5.0 million. Gross margins 27.9% (inline) and the EBITDA beat vs our estimate would have been +$0.3 million higher as SG&A expense included a $0.3 million y/y increase in provisions for doubtful accounts relating to a change of the aging profile of trade receivables. GEO reported strong EPS (diluted) of $0.05, well ahead of our estimate and consensus $0.03.
A Positive Start to The Diversification Strategy. The quarter included the first revenue stream from GEO’s newly initiated South American operations in Peru, with the first rig starting in December 2020. The company has 3 rigs in total in Peru as of today, with more meaningful revenue starting in Q1/FY21E. In addition to diversifying its West African exposure, GEO will be diversifying its revenue by commodity as its South American expansion is focused mainly on copper drilling. Management confirmed that the first few months of operations have been in line with its expectations and the margin profile for the South American operations will be inline with its historical trends, which we view positively. Management also pointed out to the strength of inbound demand from new customers and GEO is looking to expand its presence in South America by purchasing new rigs. Given the recent strength in copper prices, the reopening of economies in the continent and the overall positive macro backdrop for copper as global economies recover, we expect significant upside for GEO’s new South American operations.
Balance Sheet Strength Supports New Rig Fleet Expansion Plans; Returning Value to Shareholder Through Semi-Annual Dividend. Geodrill ended the quarter with a total of 68 rigs (+1 q/q) with 6 rigs in maintenance as normal course of business. The company ordered 1 new rig that is being manufactured and should be delivered in Q2/FY21E. Management indicated that the company is looking to expands the rig fleet to support its growth in this upcycle. GEO has a strong balance sheet, ending the year with a cash position of $6.6 million and overall net cash position of $3.5 million. The company also announced a dividend of $0.01 per share to be paid semi annually, reflecting a dividend yield of ~1.1%. This will be in tandem with the company’s share buy back program, which we note the company spent ~$0.6 million in Q4/FY20E, with a total of 395k shares retired during the year.
Extremely Bullish Outlook; Valuation Remains Cheap and Bound for Rerating as Diversification Strategy Plays Out. Management outlined an extremely bullish outlook on the call, where Q4/FY20E experienced record monthly revenues (for each month) and those trends are continuing into Q1/FY21E. Utilization and pricing environment continued to get stronger post Q4/FY20, and management reiterated that FY21E is shaping up to be a record year for the company. We revise our estimates accordingly and now reflect revenue/EBITDA growth of 16%/23% (vs 10%/12% previously) and EBITDA margin expansion of 1.3pps (vs 0.4pps). Over the medium and long terms, we continue to believe that GEO’s valuation is poised for a rerating as its diversification strategy starts contributing more meaningfully to its revenues. Early indications regarding the South American operations margin profile and inbound demand are very positive, and balance sheet strength provides further support in our confidence in GEO’s management ability to execute on that front. As this strategy plays out, GEO should be rewarded with a higher valuation range which provides significant upside for investors. Historically, GEO’s shares traded at an average of 3.0x EBITDA with an upper end in the range of 4.0x-5.0x. We believe that range will become the new norm in the long-term, with FY21E upcycle-like record numbers as the first catalyst to take GEO’s share into that range. Thus at current valuation of just 2.7x FY21E EBITDA, which is below its historical average, we see exceptional value especially as investors are paid 1.1% dividend yield to wait. We are raising our TP to C$2.90 (from C$2.40, CAD/USD $1.27 vs. $1.30 previously with FX revision a headwind of ~$0.10 per share). Our new target price is based on 4.0x EV/EBITDA multiple (from 3.5x), a reflection of the aforementioned thesis.