Mitchell Services Ltd
ASX:MSV
Mitchell Services Ltd
ASX:MSV
Price:
0.4 AUD
Market Closed
Updated:
May 24, 2024
Section:
Earnings Call Analysis
Summary
Q2-2024
Q2-2024
Company Aims for Strong Growth with Disciplined Spending
Company has grown significantly, pivoting towards steady markets like surface mining and coal, reducing exposure to volatile sectors. With disciplined capital expenditures and focus on operational efficiency, a net profit after tax improvement was seen year-over-year, and a strong EBITDA performance of $8.4 million for the quarter was reported. The company targets reducing net debt to $15 million by June 2025 and has already repaid their $16 million debt facility to zero. Future growth will be pursued patiently, capitalizing on strategic opportunities supported by a robust balance sheet. Shareholder returns improved with dividends expected between $0.015 and $0.02 per share.
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Good day. Good morning, everyone, and thank you for joining us today for the Mitchell Services' Quarterly Update. I'm [indiscernible] from Bridge Street. And today, we have Mitchell Services. We have the Executive Chairman, Nathan Mitchell; Andrew Elf, CEO; and CFO, Greg Switala. We will run through the quarterly and if you could, with your questions, just talk in the chat, and then we'll address them at the end of Andrew's speech. Over to you, Andrew, thank you.
Thanks very much, Alan, and thanks, everyone, for your interest and for joining us today. I'll just do a bit of an intro to the company and just a couple of comments on current business strategy growth. A couple of comments on the quarterly. I'll then hand over to Greg to just run through a few key highlights in regards to numbers. And obviously, we've got Nathan Mitchell, our Executive Chairman, with us who might jump in with a couple of comments along the way. And certainly, Nathan is available to help us with the questions at the end as well. So obviously, for those that are new to Mitchell Services aren't familiar, just a quick touch on our history. Obviously, Nathan's parents started a private drilling business back in '69. That private co was sold in the early 2000s to AJ Lucas, ASX-listed Lucas. 5-year non-compete and then MSV reentered the market in 2013, and we've had a significant growth story from that time. We sort of had a handful of people and $20 million revenue to where the company is today. So certainly, a lot of organic and inorganic growth over the last 10 or so years using a mix of debt and equity. And the business as it is today, obviously, very diversified by commodity sort of split between surface and underground. And very importantly, we'll touch on this as we go through today. 90% of our book is with Tier 1 global miners. From a current strategy perspective, obviously, we've called out that we're going to reduce our debt to $15 million by the 30th of June '25. We're trying to use the rigs that we have. We're being disciplined with growth CapEx. And obviously, we're very focused on net profit after tax, return on capital and shareholder returns. From a growth perspective, we have grown significantly over the last 10 years. Our aim is to keep growing, but we're going to be patient, we're going to be opportunistic, and we'll take advantage of the right opportunities when they arise. And obviously, with that balance sheet getting stronger all the time, that's going to give us optionality to take advantage of those opportunities when they do come. So that's just a bit of a quick intro and we can certainly talk more to that as we get some questions.
So just on the quarterly and really sort of just half year this year versus half year last year, significantly improved net profit after tax and obviously, the shareholder returns where there were none in the half last year. So certainly, from our perspective, a significant improvement. People would have read about what's happening with nickel and what's happening with lithium and what sort of the junior sector is a little bit slow. And as I said, we're not exposed to nickel or lithium, and we've got a very high-quality contract book with global Tier 1 major miners.
The demand for our services is still very strong. Inflation is easing. Again, that's been publicized. Hasn't been any material contract wins or losses, but the demand remains strong, as I said. We called out the Victorian gold rig count and ships. And again, that's ordinary course of business. Those underground clients will increase and decrease rig count through the contract term. And we've already seen a couple of rigs go back out down there in Victoria this calendar year.
Importantly, and again, you'll see this more when the results come out on the 22nd of February and the investor presentation. We have pivoted to surface, we have pivoted to coal, we have taken advantage of that and we can because of our diversity. And then sort of the focus from here and moving forward, this is obviously operational efficiency and really working hard as a team to keep trying to drive that top line gross margin percentage to have it fall down through to EBITDA percentages and NPAT, et cetera. So yes, we've proven that we can get those numbers when we have a few things go our way, and it's certainly a focus for the team. Before I hand over to Greg, I'll just say, as I said, our results will come out on the 22nd of February. We'll have a call on that day, we'll run through the investor preso and we'll also be available to answer any questions. So Greg, over to you with some highlights on the financials.
Thanks very much, Andrew, and good morning, everyone. Just to run through some high-level highlights in terms of the quarterly results as well as the half year numbers. Obviously, strong EBITDA performance in the second quarter of $8.4 million. That's up nearly 30% on PCP, with that improvement really driven by a gradual improvement in the margin as opposed to top line revenue, as Andrew sort of alluded earlier. And then from a year-to-date perspective, that brings EBITDA now to $20 million, again up 20% on PCP. So good to see the -- that earnings increase from an EBITDA perspective. But more importantly, and as Andrew said earlier, it's really in terms of the profitability below that EBITDA line that we are starting to see some of that leverage play out, and that's really off the -- off a backdrop of lower depreciation, lower interest charge. So our earnings before tax of $6.2 million for the half was significantly up on the prior period. And as I said, just evidence there of that bottom line earnings leverage beginning to play through. Very importantly as well, with that rig count now stabilizing to an extent and with a lack of significant working capital requirements, the cash flow generation in the business is beginning to look particularly attractive with operating cash flows for the half of $24 million at a cash conversion ratio now well over 100%, and we'll talk to that a little later on in terms of what that's done to net debt, et cetera. As Andrew mentioned, we have called out an expectation that NPAT will be between $4 million and $4.5 million. And that will be released on the 22nd of February with that half year pack. From a capital management update perspective, just rounding off in line with MSV's dividend policy. We expect that the interim dividend will be somewhere between $0.015 and $0.02 per share, pending that final profitability outcome. Capital expenditure importantly as well as remained at modest levels, $9.7 million for the half, very much in line with expectations and broadly in line with the previous period as well. And then very importantly, as I sort of mentioned earlier, a combination of those strong operating cash flows, the modest level of CapEx has driven a significant reduction in that net debt figure, a reduction of nearly 50% now to $9.1 million, which is a particularly strong result. We have called out that we remain on track to reach the net debt target of $15 million by the end of 30th of June, the end of the financial year. With that increase between now and then really driven by the fact that a dividend is going to be paid as well as a bit of extra working capital associated with the expectation that the second half will be stronger from a revenue perspective and there's usually a little bit of a working capital requirement in relation to that increase. That's probably it for me, Alan. If you wanted to [indiscernible].
Thanks, Alan. Look, I think the result is excellence. I think the team has done a fantastic job. I shouldn't read copper, but I do, it does frustrate me. But I think the guys have done an excellent job, and the team has done really well in the field. Obviously, the metrics all up from last year, and that really just comes back to -- we spent the money 2 years ago now on the new equipment and that cost is just flowing through now to the bottom line. Whilst we'd like to see utilization up, fundamentally like Andrew said before, underground rigs come and go. And we really can't force our clients to give us more work. It is what it is in essentially the East Coast of Australia. And certainly, Victoria has dropped off. I think a few years ago, when we did the deal with Deepcore and it was an excellent deal for the company going forward. There was a huge opportunity down there, which I think the Victorian government missed on the basis -- on the back of Kirkland Lake and that there was going to be a whole lot of drilling geology around Kirkland Lake, that sort of missed due to the Victorian government sort of sitting on their hands.
But needless to say and I think a lot of the investors last year were putting their hands back in their pockets on gold -- certainly on gold, smaller companies. And in Victoria, that's probably where the majority of our projects are that aren't Tier 1 and that certainly dropped off. And obviously, underground rigs work double shift 365 days a year. So that would set the difference between shift counts versus rigs. Obviously, as Andrew said, the rig count on the surface has increased and the ability to continue to move rigs around on the surface between minerals and coal is our benefit. And from our point of view, coal is still strong and steady, and I say steady because that's what coal is. It's not the up and down of the Western Australian market like lithium is booming and then it's off, gold is on, then it's off. So it's strong and it's steady even in spite of government and growing, pushing it.
So I think we're pretty happy with that, and that's been excellent for us, even though our competitors in that market look is obviously struggling, but we've continued to make inroads in that market and gaining traction overall. So I think the numbers are great. The only number that I'm sure people are going to go and ask is our -- is our peers on our EBITDA number. And I think, fundamentally, to answer that question is really around the fact that we are more around a Tier 1 supplier, especially in the coal. Margins are great, but they're not going to be as good as greenfield exploration in the field, which is a far more riskier play. And the East Coast is different to Western Australia. Western Australia is still running at USD 128 a tonne for iron ore and was the huge price for lithium. That's now dropped off. Again, East Coast is a more steady business, and that's what we're trying to build here. It's a long-term steady business that hopefully generates dividends.
So I think between dividends and buybacks, the business is certainly on track to do what it needs to do and continue what is doing. So again, there's always room for improvement and we're always looking for the 1%. But fundamentally, we're pretty happy.
Thank you, Nathan. It's okay, guys, we'll move some to the questions here. So the first one, we probably see on your chat as well for [indiscernible]. Can you comment on outstanding receivables from that gold mining plant and the potential for recovery?
I'll take that one, Alan. So gold mine is per our financials and accounts as exposure in terms of that fully provided receivable of about $2 million. That gold mine through the administration process has been sold to new owners pursuant to a docker that was put in place. Under the terms of the docker, unsecured creditors, such as ourselves, got the ability potentially to receive a dividend of up to sort of $0.30, but it's highly contingent upon cash flow performances of the mine over a 3-year period.
So to be honest, we're not banking on that. If anything eventuates from that and to the extent that those cash flows are positive, there could be something, but we'll really take that as upside down the track if we get it. But importantly, these numbers are all prepared on the basis of that $2 million being fully provided for.
And we're continuing to work for that company now on...
We do now work for the new owners on that gold mine. Obviously, it's fair to say under different commercial rates, different payment terms versus previous, and we'll watch that closely, no doubt, but has gone well so far.
And just in regard to the next question, zero exposure to nickel and lithium, which is sort of some of the previous comments into Nathan's comments that we're really focused on those other commodities sort of more sustainable on low-cost, long-life mines with global Tier 1 majors. Wage inflation, yes, things have improved. I certainly think in the mineral space, access to labor is improved.
And certainly, as I mentioned, inflation across the board is easing. We don't anticipate any sort of remuneration increases in the minerals part of our business unless man added by fair work to do so, which is predominantly at the lower end of our skilled employees or new entrants to the business. In the coal side of the business, still very busy and everyone is quite busy there. Coal prices are strong. The labor market is a bit tighter. But again, not to the point where it's inflationary. I think it's still better than it was. So overall, labor markets for us are better than they have been, which is really good and have to see the other ones.
I will look out for you. It seems that buyback pace has slowed down in the last quarter, despite decent volume going through the market. Any reason for the company is not more aggressive buying back shares at these very attractive levels?
I'll make a start, Nathan take any further comments. The policy put forward by the Board in terms of splits between dividends and buybacks was essentially to the extent that the company makes profits, return those via dividends. And as we called out a few months ago, where we made a couple of asset sales that was representative of excess capacity, I suppose. Then in theory to the extent that the rig count is reducing and the theoretical earnings capacity is reducing, we'll use those proceeds from those sales back to shareholders in terms of buybacks. And nothing's fundamentally changed there. So I suppose in short, to answer the question, there haven't really been asset sales to the extent that there were that was driving the increased buyback 6 months ago or whenever that was. We remain committed to returning profits to shareholders in the form of dividends.
Thank you, Greg. Next question. With PLB HCC greater than $300 a tonne, are you seeing more demand for exploration drilling?
And what is premium coking coal?
Yes. If you can comment on the coal.
Look, I think the -- I don't know, I can't see too many more new coal mines starting up in the future. I think it's just going to run out for the next 10, 15, 20 years. There's a couple starting. But I think, as I said before, it's a strong and steady industry. It's not boom and bust. We certainly saw that 10, 15 years ago, they're in the coal industry. I think that at the moment, these guys -- the miners are committed to trying to get out what they need to get out of the ground.
And for them to ramp up or ramp down, I think it's difficult. So I think we're pretty busy doing the gas drainage for all those mines up there in the underground. I think I can just stay steady. I can't see that suddenly people coming in and buying new mines and starting again.
Thank you, Nathan. Can you also comment on the weather impacts this year to date?
Yes, it's been challenging. It hasn't hurt us too badly, but it has been challenging. So certainly, we've got rigs at South32, Cannington. Obviously, people might have seen that rain that went through winter and out there. So we've had some delays and similarly through the coal fields a few delays. But again, that really -- we don't lose money, but we don't make money. And therefore, it sort of impacts that EBITDA percentage, of course.
But certainly, the rain we've seen in the first 31 days of the year, not above and beyond what we've got in the budget or forecast. So there's no negatives for us. We're on track. We've said at the investor presos and previously that we expect year-on-year net profit after tax to be greater than the previous year and we certainly stand by that.
Thanks, Andrew. A question from Daniel Seeney. The $16 million in debt facility taking that to acquire Deepcore is set to be fully repaid in the year ahead. Once this is completed, will you look to establish any other buyer facilities for strategic opportunities going forward?
A couple of things there. Debt $16 million facility has actually been given the strong cash flows as outlined. We've actually repaid that to zero in January, which is good news and obviously part of the reason that the interest rate or the interest charge continues to come down. Importantly though and to answer that question, that facility has got to redraw mechanism built in 4 acquisitions, just subject to now being satisfied with the acquisition. So that would be there potentially if there was anything. In terms of strategic opportunities, we could certainly take advantage of that. I dare say, just given where the overall debt profile is now as well to the extent that was a larger opportunity, I wouldn't see now having any issue with them with extending that or increasing that should they need to. But the short answer is, it's got a redraw facility for exactly those purposes.
Thanks, Greg. Next one. Do you see any interesting inorganic growth options?
We see them all the time. I don't know, I think we've done DD on 3 or 4, the last 6 months, we're always looking at people bring them to us and we're looking and we'll always do the DD, and we'll always look at opportunities to grow the business as long as it fits with us. A difficult part for us and to be honest and most people will be on there is that when we're trading at the levels we're at for us to bring an acquisition to the Board and then obviously bring it to the shareholders makes it very difficult if we're trading on a smaller multiple when we're trying to buy someone else on a higher multiple. So it needs to be the right transaction. And -- but we're always looking at transactions.
Thanks, Nathan. A question from Neil Watson. Any comments on how [indiscernible] but if you can add to it. Yes, we're in Queensland in this quarter?
Yes. I mean we can't -- we obviously can't -- we've got no idea with the what it's going to do moving forward. I don't even think knows what they're doing anymore. But obviously, as I said, the weather we've had to date hasn't impacted our forecast or anything like that. I think we're in pretty good shape so far. So unless something completely diabolical does happen, I think we're going to be okay, hopefully.
That's a similar question from Tom as well. So that was [indiscernible] Next one. How much of the $9.7 million CapEx in the first half is the maintenance CapEx and where do you expect full year CapEx to be?
With the exception of one new LF160 rig that was delivered to service excess demand from one of our major clients. With the exception of that one rig, it's all maintenance CapEx. And in terms of full year numbers, I think Daniel had us in his coverage at somewhere around $17.5 million, which I think is a good number.
Yes. So we are covered by Morgans and we are covered by Q value. So certainly, I'd sort of point people in that direction, but to have a look at some of those papers, they're quite -- they're very good.
Next one [indiscernible] BMA assets, any impact on you guys?
The assets that are being sold by BMA, we are not working on. So no issues there from an MSV perspective. We are working with BMA at Broadmeadow and business as usual. So no impacts.
Okay. Next one. What does the change in ownership at Boart Longyear remain for the industry?
It will be interesting to see. When you get Boart [indiscernible] squeezed the lemon. So it will be interesting. We're sort of asking the same question ourselves internally. We have -- and the team has built up a very large inventory base and continue to do so, so that we're trying to protect any downside or upside. But we would think that they would want to grow that business. So whether they spin out to the services or whether they spin out the supply business, manufacturing business, we yet to be seen. I think it will be interesting for sure. So I'd say, let's see in 6 months' time.
And then the valuation on the sale was interesting, too. I mean if you have a look at what that was completed at versus what other respective companies are trading at on the markets, you can form your own view on that. So I think that's probably interesting, too.
But I guess to add to that, Andrew, I guess if they do sort of spin out businesses, and I guess, with your history there, do you guys make it look on some things that you may want look interesting that you would consider?
Yes, yes all of those things where we can integrate, where we can obviously add value to our cost base or cost base, we'd be looking at. But again, really early days. We've got no idea what the funds guys are going to do with it. So that will be interesting -- really interesting.
Thank you a question for [indiscernible] you guys are with lithium and nickel, but obviously, if we buy closures and whatnot. Is there any other sort of movements in the environment as far as on the business having difficulty or possibilities of closing outside of the nickel and lithium.
No, not that on. I think if you look at the Eastern states, I think, certainly from our clients' perspective, they're on the lowest cost, longest life, best deposit mine sites on this side of the country. And the commodity prices for gold and silver Cannington and certainly net coal and other things are very good. And they make in a fortune, and there's a good strong demand for drilling.
Again, it has been tough for some of the drillers outside of some of the smaller drillers or some of the drillers that don't have a high-quality contract book. One went into administration recently, Nathan?
Yes, yes.
Up around the [indiscernible] region. So again, it's important to have that business that's focused on the right clients, the right projects, the right commodities. So it can be. But I certainly think we're looking pretty good on the side of the country, to be honest.
[indiscernible] can you remind me just on the contracts and the pricing cycle. I think, typically, it was 3 years and could just sort of rolling [indiscernible] year, right? Is that sort of the simple math there you sort of get incremental?
Yes, correct. I mean, you would say typical contract length 3 years. It does vary. It is either longer or shorter too, but it's on average. It's correct, 30% of the book would roll per year. And as we said to people previously in previous presentations that inflation did move faster at a previous point in time, then we could reset our rates. And I think it's probably fair to say now that we've caught up and refreshed a lot of the rates that we needed to.
A couple of contracts we're just finalizing now, and then that's effectively done. And then you would say from here that everything has been rebalanced and reset, and you're really looking at sort of, again, CPI-type increases from this point forward.
[indiscernible] what should we expect for average operating rigs in the second half versus the 74 during the first half?
Yes. I mean when you look at the revenue that's in the coverage from Morgans and the coverage from Q value, you can obviously compare H1, H2 and see what we're saying. Roughly, we think H2 might fall out. Probably fair to say it's going to be equal to or greater than that number to sort of come in where that coverage is suggesting.
Another question from Jason. Can you say that one, Andrew? I think we sort of partly commented, but if you want to sort of reiterate, Greg? Obviously, with net debt down and paring down target for new net debt year, considering cash billing, [indiscernible] planning to distribute additional capital shareholders while there was a strong balance sheet for inorganic growth look towards gain in the medium term. So maybe partly into before, but just slightly between net profits, but if you want to sort of reiterate?
Yes. So I think if I'm interpreting that correctly, it's an assumption that we reached the net debt target at the end of this year, then what are the plans sort of going forward? I think the answer is probably a combination of all of those, to be honest. To the extent that there's an inorganic opportunity, we will certainly look at that to the extent that there aren't any. Then as we've sort of highlighted in terms of the potential cash flows and financial performance, then the opportunity is there to absolutely continue to distribute it to shareholders.
And to the extent that those free cash flows increased and so too should be -- should the returns to shareholders.
Perfect. Thanks, Greg. That's all the questions on Q&A. Please feel free to ask any more on the chat, otherwise, we can wrap it up here. [indiscernible] year is recorded. So I'll chat you guys individually and let you know of the recording and provide Daniel's research as well. So last chance for questions, please.
Okay. Nathan, Andrew, Greg, thank you very much, and thank you, everyone, for attending today.
Thanks, all.
Really appreciate the time.
Thanks, everyone.
Thanks. Bye.