We like the risky parts of the world that come with high returns

BUSINESS DAY TV: Master Drilling CEO Danie Pretorius talks to Business Day TV about full-year results‚ which show a 35% rise in profit BUSINESS DAY TV.

BUSINESS DAY TV: We like the risky parts of the world that come with high returns Master Drilling CEO Danie Pretorius talks to Business Day TV about full-year results‚ which show a 35% rise in profit

BUSINESS DAY TV: Master Drilling today reported an increase in full-year profit and boosted cash holdings despite a dip in revenue. So profit up 14% on 9% lower full-year’s revenues of $120m. Danie Pretorius‚ who is CEO of Master Drilling‚ joins us now on News Leader.

Danie ‚ first up give us a better sense of the year that was for the company‚ because like I said‚ profits were up despite a dip in revenue‚ but very little explanation or commentary released in your Sens announcement today and that making a bit tricky getting into the nitty gritty of it all.

DANIE PRETORIUS: The top line down from $132m to $119m I think the numbers…there are two or three reasons for that. One is the currency‚ which is probably responsible for about $10.1m on the $19m‚ which probably takes us back to the $130m levels‚ and then utilisation down.

The utilisation of the group was down from 75% to 70% more on the medium and smaller machines. But the utilisation on the larger end of the fleet‚ which really impacted on the business‚ was up to just north of 80%. So yes‚ that pretty much explains why it jumped from $132m to the $119m level.

BDTV: A pretty easy explanation but why the lack of commentary today?

DP: The Sens was only released at 1.30am this morning so we’re a bit naughty with the Sens being released a bit late.

BDTV: Okay‚ so just a little bit of an oversight there. Let’s take a look at some of the pressure points coming through…a large drop in sales in your exploration services division. The lower spend on that end‚ how much of a knock-on effect does that start to have on the production side of things where you generate the bulk of your earnings and how much risk are you having to factor into this equation moving forward?

DP: On the exploration side of the business‚ the nice story for 2015 was the revenues were down on the exploration side of the business $320-$330m down to that $170m so $150m down on revenue just on the exploration side of the business. But on the Raiseboring side made up and obviously resulted in the growth that we saw today.

So we’re quite chuffed with the growth on the Raiseboring side and then in terms of the exploration business as we speak and going forward in the short to medium-term‚ we see that as a dead horse. I don’t believe there’s much going to come from that sector. We will probably maintain the levels that we’re at today‚ but apart from that I don’t think much can be expected from that division of the business.

BDTV: That then speaking in part to your rationale behind your recent acquisition of Bergteamet Raiseboring. Talk us through that and just how much benefit you see being derived from that business‚ and how soon?

DP: There are three or four reasons for us buying the business. One is that those guys used to be the number four world player. We like to think we’re number one and they used to be the number four player in the world in terms of their market cap and their size.

Secondly‚ the Scandinavian business is a first world geo…and so close. For some reason or another we were never able to bid or tender for work in that region and we thought that to get into that region‚ into the likes of Norway‚ Sweden and Finland‚ the way to do that was through acquisition.

The first thing was the way they do business‚ the way they run their operation…typically in SA or within the group our ratio to labour to a rig would probably be 1:18 with every rig having 18 employees assigned to that. In the Bergteamet case its 1:6 and remember in our business‚ labour is 50% of the cost.

So we just thought if we can piggy back on the so-called lessons learnt and development being done in that part of the world‚ which is a first-world country‚ we can probably have some upside in the short to medium-term when we deal with the labour and technology that those guys apply.

BDTV: Let’s look developed market potential versus developing markets‚ because when it comes to Africa specifically‚ what’s interesting is that you had a single customer in Africa generate 17% of your revenue‚ and Africa outside SA‚ increased sales to $27m from $19m…that’s quite a bit of an uptick. What’s your plan on the rest of the African continent?

DP: We’ve always say we like the risky part of the business of the world‚ we believe with high risk comes high return and that’s the reason we’re not afraid to go into Africa.

That’s the reason why we’ve done some work in Yemen. That’s the reason why we’ve done work in Iran and Saudi Arabia‚ so that’s the reason why we’re today in Guatemala. We like the risky parts of the world and again‚ and with high risk comes high return.

BDTV: How much more significant is Africa going to become for you because revenue contribution is now sitting at 23%‚ and that’s from 15% in 2014?

DP: I think Africa is going to be flat for the short-term. The last two years we saw some growth coming from Africa‚ but with commodities being down‚ especially gold‚ over the last 12 months‚ although gold is up today‚ we think Africa is going to be flat.

We believe the European region‚ maybe more the Monrovia‚ Asia‚ China regions are probably going to be the focus for the company growth in the short-term.

BDTV: Yes. Talk us through your order book because for the new financial year‚ that’s reached in excess of $100m. Are you satisfied with how that now sets you up for the new financial year?

DP: Yes‚ the $100m -$105m came in last year. The order book today is at $235m so that’s for the next two — three years is quite a nice position to be in.

Remember we always say that if we cover 50% of the annual revenue with the order book‚ then we’re okay‚ we’re in a good position. So to sit today with an order book at $35m‚ it’s nothing to complain about.

BDTV: Tell us about your capex plans because that’s come down slightly. What are the plans moving forward‚ specifically bearing in mind that your interest-bearing debt now at $24.2m‚ which is quite a significant jump from where it was a year ago.

DP: Yes‚ the board just approved $28m for the next financial year‚ which we would obviously monitor and track the performance of the company against the so-called expenditure. And then the second one‚ which is going to be quite a significant spend‚ is the shaft boring project going forward.

It’s still early days and we’re still in the phase of getting all the quotations together and agreeing on a so-called game plan to spend the capex. But in the short-term that’s probably where we are.

BDTV: Within this growth phase‚ and you say this phase is going to be followed by a dividend cover ratio four to five times the yearly headline earnings‚ and that could be paid out in each of the six months reporting periods. How soon do you anticipate that coming to the fore?

DP: There are two answers to your question and I know this is sometimes a difficult one to answer. But I believe what we’ve said to the investors since the IPO (initial public offering)‚ one is if we can’t give a proper return of 20% return on capital‚ we obviously need to consider a dividend.

That being said‚ it’s also a function of dealing with the balance sheet. So‚ getting off the balance sheet‚ given the capex suspension plan with a so-called 20% growth ROC (return on capital)‚ that’s probably what we would consider before we make a call on that.

And again we’re probably getting closer to the point where we could consider some sort of dividend payout in the medium-term.