MDI: Share Buyback Plan Will Drive Shareholder Value Over Coming Years

Key Takeaways

• The Explomin acquisition and increased exploration budgets position Major Drilling for revenue growth through expanded market presence and drilling activity.
  
• Strategic focus on specialized services and geographic diversity enhance revenue potential and mitigate financial impacts of tariffs.
  
• Revenue and earnings face challenges due to reliance on volatile markets, project delays, and low-margin acquisitions, risking future stability and growth.

Catalysts

Provides contract drilling services to mining and mineral exploration companies in the United States, Canada, South and Central America, Australasia, and Africa.

• The acquisition of Explomin expands Major Drilling's presence in new markets, allowing access to senior customers and increased contracts in Latin America, which should drive revenue growth.
  
• The increase in exploration budgets by senior gold and copper mining companies, driven by record high gold prices and strong copper prices, is expected to boost future revenue and profitability from increased drilling activity.
  
• The company's strategic focus on specialized drilling services, which accounted for 60% of revenue, positions it to capitalize on growing demand for technically rigorous projects, potentially enhancing revenue and margins.
  
• Anticipated recovery in junior exploration activity, buoyed by recent financings, suggests potential for increased demand and revenue from this segment in future periods.
  
• Geographic and supplier diversity provide a strategic advantage in minimizing the financial impact of potential tariffs, preserving net margins.

Major Drilling Group International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Major Drilling Group International's revenue will grow by 19.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 5.5% in 3 years time.
• Analysts expect earnings to reach CA$68.9 million (and earnings per share of CA$0.84) by about September 2028, up from CA$26.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, down from 31.8x today. This future PE is greater than the current PE for the CA Metals and Mining industry at 18.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Major Drilling Group International Future Earnings Per Share Growth

Risks

• The company experienced a 60% drop in revenue from junior clients, which, if persisting, could negatively impact overall revenue growth.
  
• Margins were affected due to project shutdowns in late Q3 and the need to retain crews during downtime, indicating future margin pressures if projects are delayed again.
  
• The acquisition of Explomin, while expanding geographic reach, brought lower margins due to a higher proportion of lower-margin underground drilling, which could continue to impact net earnings.
  
• Fluctuating revenue from copper and gold, key commodities, means dependency on these volatile markets could affect revenue stability.
  
• Persistent challenges in the North American market, particularly with limited junior exploration budgets, could continue to pressure revenue and earnings from these regions.

Valuation

• The analysts have a consensus price target of CA$13.6 for Major Drilling Group International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.0, and the most bearish reporting a price target of just CA$12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.2 billion, earnings will come to CA$68.9 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 6.5%.
• Given the current share price of CA$10.07, the analyst price target of CA$13.6 is 26.0% 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.