Master Drilling still pumping cash

JSE-listed specialist drilling company Master Drilling is clearly not feeling the pressure that the majority of mining companies are currently facing. The company – whose raise bore drilling (RBD) technology drills holes faster, safer and using less manpower than traditional shaft-sinking methods – announced another set of positive results on Tuesday.

The interim results were notably characterised by a 175% increase in cash from operations to $24 million. This was in part due to revenue growth, which was up 3.1% in rand terms and down 7.5% in dollars terms, and to the company’s cash conversion ratio moving up to 21% when compared to June 2014.

“We’re going into countries where hard currency is the talk of the town,” said CEO Danie Pretorius at the results presentation, referring to the company’s expansion into Ecuador and Colombia.

Meanwhile, the company chose not to declare a dividend, with CFO Andre van Deventer explaining that the strong cash flows puts Master Drilling in a position to take advantage of acquisition opportunities, which often present themselves during down cycles.

Alpha Wealth fund manager Keith McLachlan said Master Drilling’s success was almost entirely due to its fleet of drilling rigs, which is the biggest in the world. The company’s closest competitor only has about a third of their fleet.

Said McLachlan: “That gives them a significant cost advantage in terms of economies of scale, because, whether they are running 50 rigs or 150 rigs, their overheads are the same. They also extract efficiency from their fleet, which is mobile, automated, and less reliant on people (who are prone to error).”

Master Drilling has also made efforts to diversify away from mining and into non-commodity related services such as infrastructure and energy, including hydro projects.

No exploration, no matter

To illustrate the extent of the downturn (and despite its huge fleet) Master Drilling did not earn any revenue from exploration drilling. But Pretorius was unperturbed, saying that exploration was always the first to be cut from budgets during tough times, and that companies can only do that up to a certain point before it means closing their businesses.

Said Pretorius: “They will have to spend on exploration at some point. Nevertheless, we have made a lot of progress in reducing our exposure to commodities. Last year revenue from energy and infrastructure projects was sitting at next to nothing. Now it accounts for about 7%. The goal is to get to a point where they make up more than 30% of our revenue.”

McLachlan was not concerned about the lack of exploration either, saying it would have been the cherry on top of the cake. “The company is diversified across continents, currencies, and sectors, which reduces its risk significantly to endure any dips in mining production. And when the cycle turns, it will be perfectly poised to thrive.”

Onward and upward

It all points to a company whose growth shows no signs of letting up, irrespective of whatever fate awaits the ailing mining sector. Profits were up by 11% to $10.4m and the group saw a 10.4% increase in its dollar headline earnings to 6.3 cents per share. In rand terms, headline earnings were up 22.9% to 75 cents. Master Drilling’s return on capital employed is also improving, up to 22.12% from 19.9% in the previous corresponding period.

“Despite the economic downturn in the commodity markets, the company managed to achieve results above expectations. Management continuously drives efficiency and cost control as they look to protect the cash of the business,” said the company in a statement.

The only blip on these interims is perhaps the utilisation rate of raise bore rigs, which declined by eight percentage points from 76% to 68%. This was attributable to the tough economic environment, and the capital invested in adding machines with larger capabilities to the current fleet, which led to the excess capacity. However, revenue generated per operating rig increased by 10% $122 732. And, according to McLachlan, it won’t be too long before utilisation rates return to their 75% target.

http://www.moneyweb.co.za/news/companies-and-deals/master-drillings-cash-from-operations-up-175/