In the 1H23 presentation, the company told us the following: A rational takeover bidder might use these words verbatim!WHY INVEST IN MITCHELL SERVICES?
▪ World class rig fleet
▪ Strong client base
▪ Revenue and earnings growth
▪ Focused capital management strategy over the next 2 years
delivering:
o Significant reduction in net debt to $15m by the end of FY24
o Expected cash flow to deliver dividends
o Share buy-backs
▪ Equity price is low versus net tangible assets (NTA = 24.7c per share)
▪ Equity price is low versus traditional multiplesSo....
What are these valuable tangible assets, (the rigs) worth to competitors (net of Hire Purchase debt)?
What are the contracts worth to competitors?
Who might want to purchase?
Given KMP own approx 30%, just how big a premium to current price would even be likely to be successful?
The company is strongly cashflow positive (rapid debt pay-down, share buy-backs), AND has "...a world class fleet of drill rigs ..." Company owns (as per 2022 HY report) 100 rigs: We've had consistent messaging from management about how rigs are in demand, and how clever they were to get those 12 shiny new ones in 2022,(The timely completion of the investment program has not only ensured that Mitchell remains one of the most diverse drilling businesses in Australia, but pre-ordering 12 new state of the art rigs (in advance of the current supply chain constraints)also positioned the business to capitalise on increased demand for specialist drilling services)Now, to a rational and sensible investor in a business, using cash to reduce debt asap and to re-invest in the company (share-buy backs) is attractive, and the fleet renewal seems indeed to be sensible at the time.
BUT
every quarterly update is optimistic. Every update mentions why the previous optimism hasn't been warranted through "abnormals" (labour costs, weather, injuries, not getting bills paid). Each update reiterates the optimism. After the SMS "hiccups" (!) and now another potential unpaid bill, some shareholders (and sideline observers./commentators) are questioning directors and managers why the great demand for drilling and the great fleet are still not fulfilling the promise they keep telling us is around the corner.
1H23:
Net book amount of property plant and equip, and vehicles, approx $75m (net of depreciation)
Equipment HP liabilities (Current + non-current)= -$29.6m
so, net ballpark of plant/equip/vehicles is about 20c/share (book amount minus HP of $45m or so). I am not a plant valuer either, so I have no idea of age of rest of fleet, and whether someone looking at the fleet would value it higher than book. (opportunity/replacement cost?)
Given the big ownership by KMP, I doubt anything bar a significant offer premium would even be considered likely to be successful, but at what point does it become target for opportunists?
I'll end by saying
- I am no accountant.
- Key management personnel own a little under 30% of company
- This is not advice.
- I own a small position (net entry in the red at these prices), potentially looking to add at these prices...or exit completely!
(20min delay)