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Mirus Research

Mirus Research

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Mirus Research

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  1. Mirus Research CFA-IRC Atlantic 2012-2013

  2. Overview – Market Profile • Major Drilling Group International Inc: TSX:MDI • Current Price (Close Jan 17): $11.70 • World’s Second Largest Drilling Services Company • Rig Fleet Count: 752 Corporate Strategy: 1. Dominate specialized drilling and expand specialized capacity 2. Modernize conventional fleet and expand footprint in strategic areas 3. Diversify services within the drilling field 4. Keep debt at prudent levels 5. Be the best in class in safety and HR Overview Market Position Financial Position Valuation Risks Conclusion

  3. Overview – Investment Summary “An aggressive growth stock with a flair for efficiency.” • Organic Growth • Rapid growth with consistent efficiency. • Large capital expenditures propelled by equity offerings and retained earnings. • Expansion and Risk Diversification • Well positioned for future market shifts. • Increased diversification. • The Acquisition Buffer • Forecasted 110M for acquisitions in 2013, 100M for 2014. • Funds can be redirected in response to adverse market shocks. Overview Market Position Financial Position Valuation Risks Conclusion

  4. Market Position – Industry Overview The Negative • Aftershock from Financial Crisis • Government intervention • Slowing of China’s GDP growth The Positive • Gold demand in India forecasted to increase • Shift toward smaller more specialized projects • MDGI’s internal value chain Overview Market Position Financial Position Valuation Risks Conclusion

  5. Market Position – Five Forces Model • Favourable: • Low threat of new entrants due to technical nature and large capital requirements. • Low threat of substitutes as exploration will always be required • Not Favourable • Buyers can be large and MDGI’s business relies on winning contracts. • MDGI has many experienced competitors who are also constantly looking to improve efficiency. Supplier Power Threat of New Entrants Buyer Power Rivalry Threat of Substitute 4 = Most Favourable 1 = Least Favourable Overview Market Position Financial Position Valuation Risks Conclusion

  6. Financial Position – Debt Adverseness • Reliance on Equity for Acquisition • Lowest D/E ratio compared to competitors. • Cost of equity remains significantly higher than cost of debt. • Unnecessary cost of capital due to under-leverage Overview Market Position Financial Position Valuation Risks Conclusion

  7. Financial Position– Sound Balance Sheet • Strong Balance Sheet enables ability to take advantage of opportunities. • Highest quick and current ratios and the lowest LT debt ratio. Overview Market Position Financial Position Valuation Risks Conclusion

  8. Financial Position– Cash Flow • In Q2 2013 MDGI reported a net cash position for the first time in almost 2 years. • In Q2 2013 MDGI also reported the highest free cash flow in the company’s history. Overview Market Position Financial Position Valuation Risks Conclusion

  9. Financial Position – Strong Margins • Although for Q2 2013 MDGI reported earnings under our expectations, gross margin remained strong. Gross margins have been steadily increasing since Q3 2010 • Operating Expenditures have fallen 9% from Q3 2012. We were expecting higher operating expenditures for Q2 2013. Overview Market Position Financial Position Financial Position Valuation Risks Conclusion

  10. Valuation–Average RI DCF PER EV/EBITDA $11.5625% + Target Price = $17.9725% + $10.9025% $11.6225% + Target Price = $13.01 Overview Market Position Financial Position Valuation Risks Conclusion

  11. Valuation– DCF & Residual Income • Discounted Cash Flows: • Discounted projected cash flow per share. • High valuation reflects rate of organic growth. • Residual Income Valuation: • Discounted future ROE projections (based on EPS projections) • Low valuation reflects high cost of capital due to debt adverseness. $17.97 +$4.96 $13.01 $10.90 -$2.11 $13.01 Overview Market Position Financial Position Valuation Risks Conclusion

  12. Valuation– PER & EV/EBITDA • P/E Ratio: • Based on industry average of 8.41X • Potentially high due to low debt levels vs. competitors. $11.62 -$1.39 $13.01 • EV/EBITDA: • Based on industry average of 4.48X • Not biased based on capital structure. $11.56 -$1.45 $13.01 Overview Market Position Financial Position Valuation Risks Conclusion

  13. Risks – Macro, Industry & Company • Macro: • Euro are debt crisis • Deficient global demand • Industry • Extreme weather conditions and natural disasters • Competitive environment • Specialized skills and increases in cost of labour • Regulatory and legal risks • Country risk • Company • Foreign exchange risk • Dependence on key customers Valuation Risks Overview Market Position Financial Position Conclusion

  14. Risk Matrix Valuation Risks Overview Market Position Financial Position Conclusion

  15. Conclusion • Favourable Position to Exploit Market Opportunities • Solid Financial Position • Strong Balance Sheet • Minimal Debt, High Liquidity • Confirmative Valuation Conclusion Valuation Risks Overview Market Position Financial Position

  16. Q & A Special Thanks: • CFA Institute Research Challenge • Major Drilling International Inc. • Dr. Vijay Kumar Vishwakarma Conclusion Valuation Risks Overview Market Position Financial Position