Major Drilling Group International Inc (TSX: MDI) is engaged in the business of contract drilling, and it provides services to companies that are involved in mining and mineral exploration. It maintains field operations and offices in many countries across continents.

Why should Investors make an EXIT?

• Skilled drilling crew continues to be a challenge: The company is facing the shortage of experienced drill crews, which could put pressure on labour costs and productivity, especially in the Company’s most active markets, which could affect the company’s operating margin as well as its bottom line.
  

• Lower margin profile v/s Industry: In Q2 FY22, the company failed on maintaining its pace and witnessed lower performance under operating margin matrix, comprising of all gross margin, EBITDA margin, operating margin and net margin, which exhibits the extreme pressure on the company.

  Source: REFINITIV, Analysis by Kalkine Group 

• Long Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 70.4 days compared to an industry median of 52.6 days.

• Stretched valuations: MDI shares are available at an NTM EV/EBITDA multiple of 5.5x compared to the industry (Metals & Mining) median of 2.6x and on NTM Price/ Cash Flow multiple its trading at 7.1x against an industry median of 2.5x. This implies that the shares are overvalued against the industry. Higher valuations against an industry draws a caution line.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group

Stock recommendation

The company has shown some impressive financial results, both in terms of topline and bottom-line development. However, the management shared the concerns for the skilled drilling crew members, which could put pressure on labour costs and productivity. Furthermore, its operating margin profile is on the lower end of the industry, indicating that it is under pressure. Moreover, it also has a prolonged Cash Cycle (Days), which may create a difficulty for the company to have enough cash on hand to meet their financial obligations. Hence, considering the aforesaid rationales, we have given a “Sell” recommendation in the stock at the current market price of CAD 8.68 at 9:55 am Toronto time on February 7, 2022. 

One-Year Technical Price Chart (as on February 7, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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