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DDH

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84.0¢ ddh1 limited

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POaktree

46 Posts.

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16/01/23

14:25

Post #: 65714210
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Originally posted by Ahf1995: ↑

"thought I would start a general discussion board"

DDH1 is one of my larger holdings. When prices dropped I took the opportunity to buy at a favourable entry of 2.14x EV/NTM EBITDA, 0.86x book value noting this is a true representation of asset value given the age of the assets. This was a meaningfully lower entry compared to the EV/EBITDA of 5.6x that investors paid at the IPO. Management noted this discrepancy in intrinsic value and price and outlined an on market buyback program which was the catalyst for the reversion. The business is well managed with experienced executives who have an eye for capital allocation and business unit delegation / silo strategies (parallels can be drawn from munger/buffet management philosophy).

I consider DDH1 to be a high quality cyclical that is undervalued on forward earnings and listed comparables on most relevant valuation metrics EV/EBITDA and price to book. I view intrinsic value to be in the $1.30 - $1.80 range within 12 months. This is premised on elevated commodity prices and ongoing supply deficits relative to demand, further rig capex and increasing utilisation, increasing ROA and improving returns on invested capital.

Taking corporate net-cash levels and extrapolating drilling service demand because of this is illogical. Ultimately for DDH1 to do well commodity prices must remain elevated. I view this as an increasingly likely scenario as China comes back online increasing demand and prices from highly constrained supply deficits across most base and precious metals

Additionally I view the following to be possible catalysts to assist closing the price and intrinsic value,

1: DDH M&A
There are a number of drillers that could be acquired and integrated at a cost materially lower than the current market drill replacement value. The most likely listed candidate would be DDB. Their book value of 0.91 would need to be independently valued to gauge true value.

2: DHH1 becomes takeover target
This isn't a pie in the sky scenario. DDH is materially discounted relative to our larger cap canadian peers. The businesses would be able to realise multiple arbitrage from merging through the assets post acquisition. Moreover an asset in a stable jurisdiction such as Australia with low maintenance from the age of assets is enticing

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Well done. Looks like your analysis has moved the stock today.

DDH Price at posting: 89.5¢ Sentiment: Buy Disclosure: Held
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0 Great analysis

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