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Master Drilling pays maiden dividend

Things are looking up for the group in a year that saw margins squeezed.

Listen to the interview with Master Drilling CEO Danie Pretorius following the announcement of its 2016 financial results.

WARREN THOMPSON: Joining me on the Moneyweb podcast today is Master Drilling’s chief executive officer, Danie Pretorius. Good to have you with us, Danie.

DANIE PRETORIUS: Hi, Warren, you’re welcome.

WARREN THOMPSON: You had results that you’ve just announced on Wednesday, Danie, in US dollar terms revenue was up by 1.5% but operating profit a little bit lower, at 12.8% lower, at $25.8 million. Obviously there’s the effect of currency exchanges, which we’ll talk about, but in rand terms your heps, headline earnings per share, went up 19.4% to R2.10 and for the first time in the company’s public history, or listed history, you’ve declared a maiden dividend of 30c/share. So just from your perspective, Danie, how did you see the results for 2016?

DANIE PRETORIUS: One of the issues was the first quarter of 2016 was really tough and I think with the half-year presentation in September 2016 we said the last quarter of 2015 and first quarter of 2016 was probably the worst that we’ve experienced to date. So, yes, we couldn’t recover the loss of revenue in the rest of the year, although it was actually up in the second part of the year, it was up some 20%, so a good recovery but we couldn’t make up what we’ve lost.

WARREN THOMPSON: I think in your commentary you alluded to the fact that revenue was down based on the effects of the currency conversion but just talk to us about that shrinking or decline in your operating profit margins. What was going on; was that also a story of the first half of the year and the second half of the year?

DANIE PRETORIUS: Ja, I think the operating line, which we saw declining, one of the major issues there was obviously the costs incurred to establish the Tanzania, Sierra Leone and the machine shipped up to Mali. So that was the one part, the second part of that was the salaries, we’ve incurred quite a lot of salaries, which obviously lag the income and those were the main issues, apart from the currency that you would see in the operating line cause the shrinkage of the profitability of the company.

First dividend payment

WARREN THOMPSON: Just turning towards the cash flow generation, you noted that you had paid down debt that went down from about $34 million to $31 million and most of your capex is still for expansionary purposes but you decided to pay your first dividend, just tell us the thinking behind that.

DANIE PRETORIUS: A bit of a shift in the capex spend, I think the capex spend for this year going forward a lot of the capex will be spent on the R&D side of the business, horizontal raised boring. Unlike the capex spending in the past when we were building more machines and adding machines to the fleet, so I think a bit of a shift in capex spend going forward.

WARREN THOMPSON: From overall levels does that mean that your capex is expected to decline moving forward or how would investors anticipate how that’s going to change?

DANIE PRETORIUS: It’s probably going to be on a par with last year, we foresee a small decline in the capex spend for the 2017 period but pretty much on a par with the 2016 period.

Horizontal raised boring

WARREN THOMPSON: You mentioned that horizontal raised boring and you mentioned in your announcement today that that technology had completed a pilot milestone at the Petra Diamonds, Cullinan, mine, just tell us how things are progressing with that and how is it going in terms of now being able to commercialise that going forward?

DANIE PRETORIUS: I’m pleased to announce we did complete the project oat Cullinan and I think the enquiries we got worldwide was really, really beyond expectation and I think today we are probably much better placed to roll out that service of horizontal boring to the construction and the infrastructure industry. So it’s something that we’re really going to focus on going forward.

WARREN THOMPSON: As yet if you look at your 2016 results was there any revenue booked to the technology as yet?

DANIE PRETORIUS: Not much, no, not much.

WARREN THOMPSON: Okay, so very marginal but that’s obviously something that you are hoping to change this year as people learn about it and start applying it.

DANIE PRETORIUS: Absolutely.

WARREN THOMPSON: Okay, great. Let’s turn our attention to the words intensified market activity, I think that was the way you characterised the operating environment at the end of the period. At the same time you also gave an update on your order book, which stands at $196.6 million and your broader pipeline, which stands at $320.8 million, how do you see the year evolving in terms of the activity in your core operating geographies?

DANIE PRETORIUS: I think to answer the first part of the question, I think the order book just south of $200 million is certainly where we are today, it’s something that we are quite pleased with. Two, a pipeline of just on $300 million is probably the best position we have been in. So in terms of order book and timeline I think we are well placed. In terms of the activities that we currently see intensifying operations in the group I think the US is probably the one we are going to focus on with the infrastructure spend and whatever goes with that. So I think the US is probably the one that stands out.

New African projects

WARREN THOMPSON: You also noted that new projects starting in a number of African countries, DRC, Sierra Leone and Tanzania but in the same commentary you also noted that looking back over 2016 you experienced pricing pressures in Africa. So just give us a rundown in terms of, obviously South Africa is one of your big markets, but in the rest of Africa are you still experiencing those pricing pressures and expect to do so for the foreseeable future?

DANIE PRETORIUS: I don’t think so, with the gold price recovered to around $1200 I think with the rest of the commodities pretty much levelling out, copper and the like, I think the price increase over the last six months seemed to be okay. That’s not saying that we will recover the discounts offered early last year but I think the pricing pressure that we saw last year I think we’re in a much better position today and we don’t see more pressure from the client’s side on prices.

WARREN THOMPSON: You also said that you replaced your management team in Peru following operational issues, can you give us a little bit of colour as to what happened there?

DANIE PRETORIUS: It’s not quite replacing the management in Peru, what we’ve done is moving the current COO, Gareth Sheppard, to Canada and the US to try and build that business. We’ve appointed a new GM to take over the role of the GM in the Peruvian business. Where we did change the management team due to age was in Chile, where we brought in a replacement general manager and the rest of the HODs, not quite replacing them, we just sign on people who are currently in training, the GM is turning 66, he’s been with the company for more than 20 years, and the idea was to bring in youngsters who could probably work with him for the next year so that there’s a smooth transition to the new management.

WARREN THOMPSON: Just one other question around the geographies as well, you said that your Bergteamet, which was the acquisition you did you over a year ago, generated a return of 12.95% for 2016, is that acquisition going according to plan in terms of what you envisaged before you put that deal in place?

DANIE PRETORIUS: Yes, Warren, I think the put and call option we have comes to an end in a month’s time and the indication is that we’re probably going to take up the rest of the shares. We are under no pressure to do that, I think there are still two years for us to decide when to do that. The indications are that we’re probably going to do it sooner rather than later.

WARREN THOMPSON: Just to summarise, Danie, from what you’ve told me obviously it sounds like you’re in a fundamentally better position today than you were at this time last year?

DANIE PRETORIUS: I think so, I wouldn’t say the commodities are necessarily much better but I think our clients seem to be much more at ease about what we’re seeing today. So we’re not saying from where we are sitting that it’s the end of what we faced last year but I think we’re certainly in a much better position than we were in a year or two years ago.

WARREN THOMPSON: Okay, great, we’re going to have to leave it there, Danie, thanks very much for your time.

DANIE PRETORIUS: Thank you, Warren.

WARREN THOMPSON: That was Danie Pretorius, the chief executive officer of Master Drilling.

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