Decarbonization And Mineral Shift Will Secure A Resilient Future

Key Takeaways

• Shifting focus from coal to minerals positions the company to maintain stable revenues despite coal sector challenges.
  
• High-performing Loop decarbonization and expected rigorous improvements will likely boost future revenues and profitability.
  
• Heavy reliance on the gold sector and challenges in the coal sector, combined with external factors, may cause revenue volatility and liquidity issues.

Catalysts

Provides exploration, and mine site and geotechnical drilling services to the exploration, mining, and energy industries in Australia.

• The ongoing investment into replacement projects and service offerings is starting to yield better financial performance, with expectations that mobilization costs will continue to drop. This is likely to improve net margins in the future.
  
• The Loop decarbonization business is outperforming expectations, with new clients and innovative technology, presenting a significant growth opportunity. This is expected to contribute positively to future revenues.
  
• The potential increase in drilling budgets from gold producers, as they benefit from high gold prices, suggests increased demand for drilling services and potential revenue growth in the near future.
  
• The company is positioned to leverage its diverse operations by shifting focus from coal to minerals, which should keep revenues stable despite challenges in the coal sector.
  
• Management expects EBITDA margins to improve significantly at the anticipated 70-rig operating rate, supported by specialized high-margin services, which could boost earnings and profitability.

Mitchell Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitchell Services's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 3.0% in 3 years time.
• Analysts expect earnings to reach A$7.5 million (and earnings per share of A$0.04) by about May 2028, up from A$4.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from 11.5x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Mitchell Services Future Earnings Per Share Growth

Risks

• Mobilization costs and weather-related delays impacted financial performance in Q3, which suggests volatility in revenue and earnings due to external factors.
  
• A significant temporary working capital requirement is noted, indicating potential future liquidity or cash flow issues that could affect net margins.
  
• The company relies heavily on the gold sector for revenue (45%), and while inquiries are increasing, they have not yet translated into tangible revenue (meters), posing a risk to revenue stability.
  
• Coal sector revenue faces challenges due to weak prices and regulatory environments, impacting revenue from this segment, which constitutes 30-40% of their business.
  
• Future tax obligations are expected to increase once COVID era asset write-offs are fully utilized, potentially impacting net profits and cash flows in the coming years.

Valuation

• The analysts have a consensus price target of A$0.45 for Mitchell Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$252.0 million, earnings will come to A$7.5 million, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of A$0.25, the analyst price target of A$0.45 is 44.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.