MSV is an Australian listed drilling services company that provides services to the Australian minerals and mining industry. MSV is mainly involved in the provisions of exploration and on mine-site drilling services to the exploration, mining, and energy industries, entirely in Australia. Most clients are involved in the mining of coal, gold and base metals.
MSV owns and operates a large drill rig fleet in most states of Australia and is one of the largest contract drilling companies operating in Australia.
Over recent years MSV has been enhancing its size and quality of the drill rig fleet with higher staffing levels and has been organically growing by securing a growing number of contracts with high quality global mining clients that require contract drilling services.
On 29th November 2019 MSV completed the acquisition of Deepcore Drilling (“Deepcore”) a privately owned drilling services company and as a result Deepcore revenue and profits after that time contribute to MSV.
Mitchell Services acquired 100% of the equity in Deepcore in exchange for A$15 million cash and 250 million MSV shares at an agreed issue price of $0.068 per share.
The acquisition price of $44 million represented an enterprise value for Deepcore (and reflected an acquisition multiple of 3.52 x Deepcore’s then current FY20 forecast EBITDA of $12.5 million). The Deepcore acquisition was expected to be 38.5% EPS accretive. The acquisition price was paid in partly cash and partly via share scrip. MSV increased debt funding to pay for the cash part of the vendor consideration.
Deepcore are industry experts in deep hole directional diamond core drilling with the deepest directional diamond core drilling hole achieved from underground in Australia of 2,058.1m drilled at Stawell Gold Mine project in Victoria
Deepcore are also industry experts in acoustic (noise suppression) drilling and provide customised equipment for specialised drilling in house. The acquisition provided MSV a position of strength to leverage the growth opportunity of gold mining in the state of Victoria.
On 27th February 2020 MSV announced the following:
- MSV declared revenue and EBITDA for the six months ending 31 December 2019 of $73.0m and $14.1m respectively.
- MSV expected to generate revenue and EBITDA for the full financial year ending 30 June 2020 of $170m-$180m and $34m-$36m respectively.
On 15th April 2020 MSV advised strong FY20 third quarter (Q3 2020) operating and financial performance:
- Revenue $51.8m
- EBITDA $10.1m
- Operating cash flow $7.4m
- Operating cash conversion ratio 73%
- Net Debt reduction of 16% since 31 December 2019
Note:
- MITCHELL SERVICES LTD is listed on the Australian Stock Exchange under ASX code: MSV.
- MSV recently reported half year results to 31 December 2019. The last full year results were to 30 June 2019.
- The latest financial results and updates are available on FACTSET or on the ASX website and will be helpful to your answers.
Listed companies operating broadly in the mining services industry in Australia
Large companies: Orica (ORI), Incitec Pivot Ltd (IPL), Monadelphous Group Limited (MND)
Small companies: Imdex Limited (IMD), Boart Longyear (BLY), Swick Mining Services (SWK)
Note that in all cases above there are variations to the MSV services, business model and balance sheet structure.
- Make a forecast for EBITDA the whole MSV group entity for FY21 (i.e. for the fiscal year ending 30 June 2021). Your assessment must be simple, broad and approximate by nature, but articulated with reasons and highlighting margin assumptions. (about 1.5 page) (7 marks)
- Determine an appropriate prospective 2021 EBITDA multiple to adopt for the valuation of the consolidated group MSV having regard to any relevant benchmarks, relevant peer companies and the pace of earnings growth. You could consider comparable companies listed in Australia or overseas where relevant. (about 2 pages) (9 marks)
- Estimate the likely level of net debt at 30 June 2021 based on EBITDA, expected cashflow conversion and capital expenditure. (about 1 page) (6 marks)