MINING services specialist Master Drilling, a proverbial provider of shovels in a mining boom, should really be flying.
The group’s share price is up about 22% over a year. That’s sprightly. But this is nowhere near anything notched up by the gold and platinum miners — not even close to the much-maligned coal miners, boosted recently by the choking off of oil supplies. While there is no JSE-listed comparative, investment counter Sabvest Capital recently tripled the value of its holding in mining service-orientated industrial holding company Apex Capital Partners, which owns mining service operations such as ELB Equipment and DRA Global.
Why the overriding scepticism? Most certainly the jaundiced sentiment witnessed in the past few weeks — which pegs the group on a trailing p:e of five and a forward multiple of 4.5 — stems from an unexpected move to defer the dividend payment for financial 2025. But a deeper dig pinpoints a few other stress points.
Master Drilling’s latest results arrived wrapped in a narrative of resilience and forward momentum, with revenue increasing 7.8% to a record $292m. Gross profit actually declined slightly to $82.6m, even as operating profit rose to $46.5m.
Master Drilling management, led by industry veteran Danie Pretorius, described “a resilient year … achieving a record high … against a backdrop of global market and economic uncertainty”. Pretorius said the performance was underpinned by long-term contracts and geographic diversification, positioning the business as stable and forward-looking. But over a longer horizon the pattern remains uneven, reflecting a company that is growing but not yet demonstrating the consistency of a true compounder.
Master Drilling, as the name implies, specialises in drilling solutions across exploration, blast hole, raise boring, reverse circulation, diamond and directional drilling in the mining, civil engineering and energy sectors.
Drilling down on the numbers
Most investors would still regard it as a high-return capital allocator, reinvesting heavily to build a long-term competitive advantage. That premise is not broken, but it might be a little more brittle with headline earnings rising just 5.1% to 18.4c a share. Between 2021 and 2025, headline earnings rose from about 13.6c a share to 18.4c a share, a cumulative gain of about 35%, vs revenue up more than 70% in dollar terms. This might well reinforce the notion that growth has not translated proportionally into shareholder returns. Management acknowledges that “profitability faced some pressure attributable primarily to specific operational challenges”. This indicates incremental revenue is being generated at lower levels of efficiency, suggesting cost pressures, reinvestment demands and utilisation dynamics are limiting operating leverage.
The business development manager at Master Drilling, Izak Bredenkamp, stresses margin pressure was linked mainly to a combination of project execution delays and below-target fleet utilisation in certain regions. There were also inflationary cost pressures coupled with the ramp-up phase of newly commissioned operations, as well as a number of projects incurring mobilisation and training costs ahead of revenue normalisation.
Bredenkamp tells the FM that management does not believe these pressures are structural. “The majority are considered cyclical or project-specific and are expected to improve as projects mature and operating conditions stabilise.” He adds that the group continues to focus on operational discipline, productivity improvements, cost management and technology-enabled efficiencies to support margin recovery over the medium term.
Cash flow under the microscope
But this inefficiency is more pronounced in Master Drilling’s cash flows. Net cash generated from operations came in at $17.9m compared with capital expenditure of $20.6m, showing that internally generated cash is reinvested in the business. Importantly, 66% of capital expenditure was directed towards expansion. This highlighted that the company remains in an investment phase, but also reinforces the reality that free cash flow remains constrained even as management noted that “cash resources continue to be managed carefully”.
Bredenkamp says the group remains in an investment phase where capital allocation is focused on supporting long-term growth opportunities and expanding operational capability. “Management views disciplined capital investment as essential to securing future revenue streams and maintaining technological competitiveness.”
But he points out that, at the same time, there is increased emphasis on improving cash conversion, optimising working capital and prioritising higher-return projects. “Over the next two to three years, the expectation is that a greater portion of recent capital investments will begin contributing more meaningfully to earnings and operating cash flow. As utilisation levels improve and the order book converts into revenue, management expects stronger free cash flow generation and a more balanced relationship between capex and cash generation.”
The utilisation problem
The effectiveness of this reinvestment ultimately depends on utilisation, with the raise-bore fleet operating at about 70% and exploration drilling at about 53%. This is below management’s stated ambition of “targeting a benchmark of 75% to ensure the highest levels of productivity”. In 2024, the raise-bore fleet ran at about 73% utilisation, while by mid-2025 total raise-bore utilisation had slipped to the mid-60% level and exploration/slim-drilling utilisation closer to the low 30s, still some way below that 75% benchmark.
Bredenkamp says fleet utilisation remains a key operational focus area. Primary constraints include project timing delays, customer approvals, mobilisation lead times, regional operational disruptions and the commissioning cycle associated with new equipment deployments.
He reiterates that management continues to target utilisation levels above 75%, but notes that acceptable returns can vary depending on the specific equipment type and contract profile. “As newer assets become integrated into longer-duration contracts and project execution normalises, management expects utilisation trends to improve progressively. Importantly, the strategic investment in fleet capacity was made with a long-term demand outlook in mind rather than short-term cyclical conditions.”
One encouraging takeaway from recent results was promising future growth indicators — a “record pipeline of $997.8m” and a “stable order book of $371.4m”. These future growth indicators speak to Master Drilling’s ambition to “deliver a wider range of turnkey solutions” that will transform the group into “a more comprehensive contractor”. This compares with a pipeline of $695.8m and an order book of $332.5m at the end of 2024. The record level reflects a step-up in visibility but also raises the bar for execution, particularly given the company’s historically uneven growth profile.
Despite the stout pipeline and order book, Master Drilling posed a difficult dividend dilemma to investors by deferring the payout decision until there is greater certainty on “the possible consequences of current global hostilities”. The market’s reaction to the dividend decision reinforces a fundamental principle: investors ultimately trust cash, not accounting. Dividends act as proof that earnings are real, distributable and repeatable. The response was immediate, with the share price falling 9.14% to R16.21 from R17.84, reflecting not just disappointment but scepticism.
But Bredenkamp says management remains encouraged by the quality and diversity of the pipeline, which reflects increased customer engagement across multiple regions and commodities. “While not all identified opportunities will convert into firm revenue, the order book provides improved medium-term visibility. Historically, conversion rates have varied depending on market conditions, customer capital approval cycles and project readiness.”
Bredenkamp expects a meaningful proportion of the active pipeline to convert over the next 12–36 months, particularly where discussions have progressed to advanced technical and commercial stages. He also reassures that the group still applies disciplined project selection criteria to manage execution risk and preserve capital efficiency.
He says the deferred dividend reflects a prudent and disciplined capital management approach during a period of elevated investment and operational transition, adding that the near-term priority is to preserve balance sheet flexibility, support growth opportunities and improve operational resilience. “Key considerations for resuming dividend payments include stronger free cash flow generation, improved utilisation rates, reduced leverage pressure, and increased confidence in earnings sustainability.”
It is difficult, though, to defer expectations of bumper earnings and a strong flow of dividends in the middle of a robust period for commodities. For the FM, because its earnings are normalised and anchored to headline performance rather than reported earnings, Master Drilling appears less like a high-growth compounder and more like a cyclical, capital-intensive contractor. Businesses with constrained cash flow conversion, utilisation sensitivity and uneven returns typically command more conservative valuation multiples. Unless the group can demonstrate sustained improvements in margins, bore utilisation and cash flow conversion, the current earnings profile will not justify a premium valuation.
Apex Partners holds a 70% stake in The Financial Mail Group
This article first appeared in the Financial Mail, a member of the Financial Mail Group.
