Mitchell Services is poised for a “significant” jump in earnings before interest, taxes, depreciation, and amortisation (EBITDA) in the 2022–23 financial year (FY23), according to leading stockbroker Morgans.
With 100 rigs at its disposal, Mitchell Services has built a lucrative fleet that can quickly respond to client demand across a variety of commodities and drilling types.
Morgans said the drilling market was “highly constrained” and that Mitchell Services looked “well insulated” from potential slowdowns in junior exploration activity due to 90 per cent of its revenue being derived from Tier 1 mining clients.
While the stockbroker said industry-wide inflationary pressures would naturally be a headwind, it suggested the market was underestimating Mitchell Services’ ability to offset those pressures.
Morgans said offsets included the company’s increased utilisation, confirmed rate rises (with approximately 30 per cent contract renewal), and improved contract tenor and terms.
Mitchell Services’ move to implement dividend payments in FY23 has also been looked upon fondly, as has its measured capital management strategy.
“We think (Mitchell Services’) share price has been held back in recent years by the deferral of its clear dividend-paying potential while the company prioritised growth,” Morgans said in a recent appraisal.
“The announced policies now remove that uncertainty.
“(Mitchell Services) looks far too cheap on both an EV/EBITDA* and now a free cash flow yield basis (17–21% FY23–24) … the longer these cash flows remain undervalued by the market, the higher the probability that third parties seek to unlock it via M&A (mergers and acquisitions).”
Morgans has revised its blended valuation for Mitchell Services from a $0.71 price:sales (ps) ratio to $0.60ps. The stockbroker said Mitchell Services could plausibly generate a FY23 EBITDA “comfortably” over $50 million.
MSV was trading at $0.38 with a market capitalisation of $86 million at close on July 25.
* EV/EBITDA represents the ‘enterprise value’ to ‘earnings before interest, taxes, depreciation, and amortisation’ ratio.