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magazineIs Capital Drilling now a takeover target?
Capital Drilling (CAPD) 39.5p
Loss to date: 20.8%
Original entry price: Buy at 49.9p
Having earlier this year enjoyed a tidy paper profit on our Capital Drilling Trade, issues affecting miners and their service companies in Tanzania mean now we are losing money owning these shares. Don’t panic.
We believe the stock won’t stay weak for long. Indeed, this is starting to look like a potential takeover target – perhaps for an oil services company looking to diversify sector exposure.
Capital Drilling’s shares have been weak due to having two clients in Tanzania where the government is trying to extract more money from mining companies through various means. For example, this year has seen a ban on exporting unprocessed ore as a way of encouraging companies to build processing facilities in-country.
That’s caused disruption to some gold mines as material cannot be sold so operations are being wound down. But, importantly, other mines still run as normal as they are producing dore bars which are still allowed to be exported.
One third of Capital Drilling’s market value has been wiped off since May due to Tanzania exposure and lower guidance for dividend payments as cash is needed to be spent on additional equipment in order to service the resurgence in the mining industry.
Yes, some downgrade to the share price is warranted as additional work in Tanzania may prove harder to get near-term as miners could be cautious about spending more money until there is a resolution with the government. Capital Drilling has also seen drilling work in Serbia conclude four months earlier than expected.
These issues have led the company to say full year revenue may now come in at the lower end of its previous $120m-$130m guidance.
While that’s disappointing, we think the severity of the share price fall is an overreaction, particularly as its two Tanzania contracts involve drill work on mines unaffected by the government’s new rules. It also has plenty of work in other countries such as Egypt, Mali and Mauritania.
Broker Tamesis says the company is now trading on a mere 2.1 time enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA). That’s significantly below the 5-6 times EBITDA multiples at which established service companies should be trading, it says.
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