Capital Share Discussion Threads

[benjonesinvestments] 18/8/2023 15:27

Hi Adam,

I think you may have a point on Boyton aiming for a larger company over prioritising return on capital. I like their drilling business and I like the labs business but I'm also sceptical on the mining business. Particularly given its capital intensity and debt funding requirements.

I'd rather see them pay down debt before buying back shares but both look to be preferable over the mining business. I think it's worth asking management's view on this and how they view capital allocation going forward.

[adamb1978] 18/8/2023 15:22

HI Shanklin - understand, hence linking it to the Allied proceeds. No impact on leverage, boost the share price...etc. If they do eventually want to sell (I have my doubts given the age of the Exec Chair), getting the price up would be a good thing!

[shanklin] 18/8/2023 14:58

With the known African risk, I don't its been phenomenally wise to introduce a load of leverage so that we have another load of risk to worry about.

Presumably if the ultimate aim is to sell CAPD on to a trade purchaser, the company may have little or no interest in short term share price movements

[adamb1978] 18/8/2023 14:52

Hi Ben

Thanks for the rough numbers - confirms my suspicion that the NPV of those large contracts didnt sounds spectacular, which is why I was wondering about whether there were benefits from being able to use the purchased stuff for contracts after they'd ended. Mabye there's x-sell benefits as you suggest.

Agree about returning cash to shareholders - I sense that the 'Exec Chair' has an ego though so just wants a bigger company.

They've just announced an IMC call for next week, so I'd encourage people to submit constructive questions - I think it helps to raise certain issues with management. For example, with the Allied Gold IPO coming up, why not take those proceeds and use it to fund a tender offer for CAPD shares at say 85p or similar? I know management think there's upside to the Allied valuation, but with NAV of CAPD over 100p now, there's significant upside from buying back a chunk of shares

Adam

[benjonesinvestments] 18/8/2023 14:08

It wasn't specifically defined but I see sustaining capex simply as the annual cost of maintaining that equipment. Truthfully, I'm not sure what proportion goes through as cost of sales and what proportion is capitalised. I'd expect the bulk of it to be capitalised.

[muckshifter] 18/8/2023 12:30

Did they define what they mean by "sustaining capex" as opposed to operating expense?

[benjonesinvestments] 18/8/2023 12:08

I meant to say that $10m of sustaining capex is annual.

I ran some brief numbers and got $6m FCF per year from both contracts combined (before discounting) but need to go back in more detail. Financing the debt combined with sustaining capex really takes a chunk out of the returns. Returns don't look spectacular... need to go through it in more detail because you'd have to question why management would engage in low return projects ahead of paying down debt or returning cash to shareholders.

The mining contracts came with new drilling contracts. So perhaps the idea was for the mining contracts to help win extra drilling business and the margins are made there.

[adamb1978] 18/8/2023 07:46

HI Ben

Thanks for the post above re capex. I'd been meaning to run the numbers on just how profitable these were givn the glut of capex, and obviously the useful life of the kit beyond these contracts would be a key driver in those returns. Will see if I can find the time to look at more. Surprised that margins and ROCE would only be in line with the rest of the group as I'd hope that they wouldnt require more admin cost - perhaps gross margins on these are lower

Adam

[rivaldo] 18/8/2023 06:25

CAPD's largest listed holding - PDI - was up 10% last night to $0.205, it's highest since around last December and now worth around £14.5m.

No further news yet AFAICS re the Allied Gold IPO, which was due to happen "on or around" the 17th August....

Chrysos' shares have just been suspended from quotation. There's an interesting post from DangerCapital elsewhere - he's quite right imo in suggesting that such a suspension is likely to be the precursor to a fundraising for Chrysos, and also states (hope he doesn't mind me copying):

"Shows what a great deal Chrysos has turned out to be for CAPD. They get the benefit of rapid expansion for very little capex, the bulk being funded by ASX tech investors on multiples that CAPD could never get if they had to buy rather than rent the Chrysos machines."

[benjonesinvestments] 17/8/2023 15:55

Hi Adam,

Capital emailed back and say they generally expect the mining equipment to have a useful life of 12 years, although not all kit was bought new.

Capital estimate about $10m of sustaining capex required across both mining contracts combined.

They don't provide op costs for the mining contracts but said EBITDA margins and ROCE can be assumed to be in line with broader business.

Hope that helps

[rivaldo] 16/8/2023 14:25

Berenberg have a 171p valuation and a Buy - they remain very positive:

"Shares in mining services provider Capital Ltd have room to double in price, after an in-line set of interim results, Berenberg said.

The investment bank has a 'buy' rating on Capital shares and a price target of 171 pence per share. Capital was down 2.8% at 83.00p on Wednesday afternoon in London. The stock is down 13% over the past 12 months.

London-based Capital on Wednesday reported pretax profit of USD23.4 million for the six months that ended June 30, up 55% from USD15.1 million a year before, on revenue of USD154.3 million, up 12% from USD138.1 million.

Earnings before interest, tax, depreciation and amortisation, adjusted for the accounting treatment of leases, rose 10% to USD43.9 million, from USD39.9 million a year before, though the Ebitda margin narrowed marginally to 28.5% from 28.9%.

The results were in line with guidance that Capital had given last month, with the revenue figure having been already provided by the company. Berenberg said Ebitda of USD43.9 million was in line with its own estimate of USD43 million.

Capital held its interim dividend at 1.3 US cents, which also was as Berenberg had expected.

Looking ahead, Capital guided for full-year revenue of USD320 million to USD340 million. This would be up from USD290.3 million in 2022. Both Capital Drilling and Capital Mining expect to see revenue growth in the second half of the year, it said, due to the start or ramp-up of existing contracts. These include the potential restart of disrupted operations at the Meyas gold project in Sudan.

"Capital has delivered a solid H1, underpinned by continued strong performance on the Sukari waste mining contract, and in spite of the shutdown of operations at Meyas Sand following the escalation of conflict in Sudan," commented Berenberg analyst Richard Hatch.

Capital has mining services contracts with London-listed Centamin PLC for the Sukari gold mine in Egypt. These were expanded at the end of 202.

"We continue to be encouraged by Capital's consistent addition of both drilling and mining contracts on high-quality assets," Hatch said."

[benjonesinvestments] 16/8/2023 14:09

Hey Adam,

Capital confirmed to me earlier in the year that equipment at Sukari would be in sufficient condition for a renewal or new project (existing contract 4 years and another contract suggests at least 8). It's a good question though and I don't have a hard number.

I've just emailed Capital to ask that, among other qs:
Expected useful life of mine equipment?
Expected annual sustaining capex of the $65m of equipment across Suakri and Ivindo?
Typical operating costs of the mining contracts?

Will share answers on here when I hear back from them

[davebowler] 16/8/2023 12:13

Tamesis -

We retain our target price noting further ongoing consolidation in the sector with the Perenti offer for DDH1 in Australia. As in the mining industry, consolidation clearly bodes well for the services business. We also believe that the increase in size and diversification of Capital’s business begets growth in a virtuous cycle that is hard to break (assuming quality is delivered). It basically allows Capital to leverage a greater offering of products into a larger clients base both by size and geography. This thematic has much further to run.

[adamb1978] 16/8/2023 10:05

Does anyone know how long the equipment which they're buying for the recent major contract lasts? and I mean actually useful life, rather than accounting life / deprecation rate. Just interested in when it becomes cashflow positive and/or how much cash the capex glut might generate over its life
Thanks

[adamb1978] 16/8/2023 10:03

Thanks hpcg

[hpcg] 16/8/2023 09:28

They are relatively comfortable with consensus, will look at Sudan start up in the final quarter, reports of some vandalism on site, Gabon has been ramping up in terms of cost but is now generating revenue. Admin expenses from H1 will be the same in H2; they have fully provisioned Firefinch - Morila but by the sound of it hope to get some or even all of it back. Demand is still strong. There was a question about the Centamin contract expiration, but they and I would be very surprised if they took it back in-house, and the equipment has re-use should that happen. They are pricing in higher debt cost to bids. MSALAB margins grow on a unit basis as the lab gets established.

[adamb1978] 16/8/2023 09:16

Thanks hpcg. I couldnt make the call this morning. Was there anything which would help inform the forecasts? Often there's a couple snippets which help directionally

[hpcg] 16/8/2023 09:14

The report addressed Capital Innovation, which should put minds at rest there, nothing outlandish on the cash investment front.

Thanks to Mark for the questions. I'll reiterate about August, as evidenced by the lack of analyst questions on the call, and hope the exec team will be back in London in September when there might be a few more people around to visit.

[nk104] 16/8/2023 09:04

Given the spike in net debt I think we should be using some of the investments to pay it down. The investments aren't a train set for the Board to look at - a bit of judicious selling is in order.

[hpcg] 16/8/2023 08:44

I don't think this August is the best time to judge any share price over the course of the next 12 months. There is drift almost everywhere in the small cap space.

[hpcg] 16/8/2023 08:41

Is it me or them this conference call interruption?

Edit - had to log back in.

[adamb1978] 16/8/2023 08:26

Rightly or wrongly, the market isnt giving them value for P&L performance, and zero for the investment portfolio.

I think they need to take a similar approach to CNIC in order to get the share price moving, namely focus on cash. They set out a very clear plan for usage of cash and the share price has woken up. Its as much about messaging as it is about action.

Post this capex glut for the recent contract, they need to be talking about FCF yield and share buybacks and the messaging needs to be more focussed on cash and shareholder returns. I thikn the divi is fine - I'm not sure they'd get more investors increasing it substantially beyond a 3.5%-4% yield, so an annual 5%-10% increase or similar is fine. However the company is trading below NAV - they need to be filling their boots with a share buy back!!!

[rivaldo] 16/8/2023 08:18

Tamesis have retained their 160p target price and note the current year P/E of 5.6.

They state that H1 results were "bang in line" at EBIT level and above, with EBITDA margins and net profit slightly down due to "the high growth in the MSALABS business where costs are front end loaded" and "as the business incurred a higher non-cash finance charge from its leasing arrangements".

Here's the strong outlook and a couple of interesting extracts:

"We retain our target price noting further ongoing consolidation in the sector with the Perenti offer for DDH1 in Australia. As in the mining industry, consolidation clearly bodes well for the services business. We also believe that the increase in size and diversification of Capital’s business begets growth in a virtuous cycle that is hard to break (assuming quality is delivered). It basically allows Capital
to leverage a greater offering of products into a larger clients base both by size and geography. This thematic has much further to run."

"MSALABS relationship with Chrysos continues to deliver. MSALABS now has the largest international network of the highly successful and popular Chrysos PhotonAssay technology which continues to grow. The company is guiding to 21
PhotonAssay units by 2025 vs six by YE 2022. Each Chrysos unit is expected to generate annual revenues of US$3-5 million so we are looking at c$80m+ of revenue from MSALABS vs just $3m in 2019. This revenue growth has come at minimal capital
outlay. As such we would argue this side of the business has similar characteristics to a typical tech company which implies double digit EBITDA multiples."

"Positive outlook. We have gone through the drivers of growth into H2 2023 and beyond and the company’s revenue guidance of $320-$340m reflects this positive outlook. Management also notes “tendering activity remains robust across the Group with a number of opportunities progressing”

Investment Case

As has been the case for nearly every announcement in the last three years these results are strong and point to further strength and growth. The company will have increased revenue by 2.4x from 2020 this year yet the share price is 13% higher than it was in Augst 2020. With activity in the mining sector still strong and long-term contracts locked in, we see safety in the medium term revenues and margins. Meanwhile the shares are trading on PE and EV/EBITDA multiples of 5.6x and 2.6x and a dividend yield of 3.6%. This implies next to no growth in the business yet all three components continue to deliver."

"On a comparative basis – see Fig 3 below – the company trades at a discount to its peer group albeit we would note the whole sector has derated. We would also point out that the table understandably suggests a bigger and more diversified business carries a higher multiple. We expect this will evolve with the Capital share price and/or we may see further consolidation."

[concentrate] 16/8/2023 08:07

If they're consolidated figures, I don't think they'd include MSA Labs investment.

[rivaldo] 16/8/2023 08:05

The split of the $4.8m additions per Note 16 is $4.2m listed and $0.6m unlisted, so the biggie can't be MSA-related. I can't remember offhand precisely where CAPD participated in a listed fundraising this year, but have a vague memory of posting something to that effect!