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Mitchell Services: A must-buy stock

Mitchell Services

Everything is trending in the right direction for ASX-listed drilling services company Mitchell Services, which achieved record quarterly revenue in the September quarter.

Mitchell Services generated $61.1 million of revenue across the three months, representing a 16 per cent increase from the $52.7 million earned in the first quarter (Q1) of FY22.

The company’s success has been a result of a strong and proactive business strategy, where it was critical to get in before the rush.

Mitchell Services pre-ordered drill rigs before the latest commodity boom, meaning it had the toys to offer the market when demand increased.

The company put the increased revenue down to a combination of increased pricing and utilisation, where its average operating rig count in Q1 FY23 was 81 compared to 69.3 in Q1 FY22. The rig count increase was largely due to new or expanding contracts, predominantly with Tier 1 global mining majors.

Focusing on Tier 1 mining clients has provided a strong backbone for Mitchell Services’ success, with 90 per cent of its revenue derived from majors – including the likes of Newcrest Mining, South32, Anglo American, Glencore and more.

The drilling services company also enjoyed a 24 per cent increase in its EBITDA (earnings before interest, taxes, depreciation, and amortisation) from $8.1 million in Q1 FY22 to $10.1 million in Q1 FY23.

“Whilst the majority of this increase was due to the aforementioned increase in revenue, it is pleasing to note that the EBITDA margin is showing early signs of normalisation (16.5 per cent in Q1 FY23 compared to 15.4 per cent in Q1 FY22),” Mitchell Services chief executive officer Andrew Elf said in the company’s quarterly.

Mitchell Services provided an update on its recently implemented capital management policy, which was first announced in late June.

The company’s gross debt was $42.9 million at June 30, 2022 following the completion of the capital investment program. This dropped 10.6 per cent to $38.8 million as of September 30, 2022.

Mr Elf said capital expenditure was being limited, as originally planned.

“Maintenance capital expenditure will continue to be deployed as required with growth capital expenditure limited where it makes sense to do so,” Mr Elf said.

“Capital expenditure during Q1 FY23 was $3.6 million and represents a quarterly reduction of 47.1 per cent when compared to the Q1 FY22 figure of $6.8 million.”

Under Mitchell Services’ recently implemented dividend policy, up to 75 per cent of its reported post-tax profits are intended to be paid to shareholders in the form of a dividend.

The company intends to declare an interim dividend with the company’s half year results (in February 2023) with a final dividend to be declared with the company’s full year results (in August 2023).

Mitchell Services has also been undertaking an on-market share buy-back, where the company has used to proceeds from the sale of two drill rigs, which fetched $2.5 million compared to $400,000 when they were first purchased in 2014.

“The proceeds from these sales as well as proceeds from further sales (if any) will contribute towards the funding of the recently announced on-market share buy-back,” Mr Elf said.

“By way of an update in relation to the buy-back, the company has now purchased back 2,765,481 shares at a combined cost of $1,018,810 ($0.368 per share).

“At the company’s current equity price (which is low versus its net tangible assets and low versus traditional earnings multiples) the buy-back represents outstanding value for the company.”

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