DDH - DDH1 Drilling

[Ferg]

DDH1 Drilling is a relatively new listing on the ASX.

They drill mining holes for others so they are dependent on the various mining industries.

An increasing fleet size, utilisation and earnings rate have seen revenues and profits grow.  They pay a dividend.

They are already number 1 in Australia.  Are they going to be continue to be an aggregator in the drilling industry?

Investor centre here: https://ddh1drilling.com.au/investors/

Chart looks awful: https://nz.finance.yahoo.com/quote/DDH.AX?p=DDH.AX

But at 67c the P/E ratio is under 4.

The IRD website has DDH being exempt from the FIF tax rules for the year ended March 2022.

[Benji]

They have buy-back now but not yet buy any back 

Friend tell me about this company and I look at it and is good.

I hope buy some next time I have saved money.

[Plata]

I notice it is a relatively new listing, with a large founder % held. Always have to question why they were keen to get out. The exec team owns a pretty pitiful 3%, not even 15 million nzd. I note ROIC is very high at ~30%, are their services that difficult to reproduce? Can that be maintained? Definitely pretty compelling on valuation but why invest in this over something like Rio tinto, which is on a similar PE at the moment yet is arguably safer (better scale, geographic diversity etc).

[Ferg]

From page 7 of the prospectus:

"The funds raised by this Offer, together with existing cash, will be used to pay down borrowings at Completion and provide Existing Shareholders with an opportunity to realise part of their investment in the Company. Additionally, an ASX listing will provide DDH1 with access to equity capital markets, give employees an increased opportunity to participate in the ownership of the Company and provide a liquid market for Shares. The Existing Shareholders will remain strong supporters of the Company and will hold approximately 60.2% of the Shares at Completion of the Offer."

As to why founders wanted to partially cash out - everyone has their reasons and most have some sort of exit strategy when setting up a business they can build to a certain level.  I see this as being more like DGL rather than MFB.

You ask: "Are their services that difficult to replicate?"  I suppose anyone could invest many millions of dollars in equipment to drill exploration and sample holes to depths of 3km all around Australia - but I don't see people queueing up to do it and the DDH customers appear to be "sticky".  It is a job that requires experience given the enormous cost of getting it wrong, like losing drill heads etc many hundreds of metres underground.

Also, regarding investing in Rio Tinto instead of this - that argument could be applied to any other organisation.  It is not an "OR" choice; "AND" is an option.  FYI I see reported insider % for Rio currently sits at 0.00% per Yahoo so I'm not sure about the relevance of that point.....but yes I hear you in that "God is on the side of the big battalions".  But it is nice to get in at the ground floor every now and then, i.e. greater risk / greater reward etc.

I reckon start a thread on Rio Tinto.  Go for it.

[Plata]

Good points. Do you think that needing experienced staff acts as a kind of moat for this company? I like that they are not afraid to buy back stock, really advantageous for NZ investors with no capital gains tax.

[Ferg]

Good points. Do you think that needing experienced staff acts as a kind of moat for this company? I like that they are not afraid to buy back stock, really advantageous for NZ investors with no capital gains tax.

Agreed but keep in mind "experience" is a two way street.  Yes it it *can* be a moat but it can also be a constraint.  Once staff are experienced they may be more valuable to someone else (e.g. in the USA or a competitor?) which potentially puts staff and cost pressures on DDH if they do not get it right.  But also with experience comes doing the job once and doing it right....not necessarily so for those still learning.  I am curious to know how DDH will go about retaining staff to hold onto that "experience" - I need to read up on this.

So "experience" could be a moat but I'm not sure that is enough.  That said, I am aware of others in slightly different but highly technical areas (i.e. fibre optics) where cheap does not necessarily always get the job - the client wants it done once and done right where they know there won't be any issues.  DDH have stated they are pursuing deeper drilling contracts that are highly technical.

Drilling is a relatively complex and dirty business that requires big bucks.  But with the big bucks comes big capex and big R&M bills - there will need to be an ongoing cycle of reinvestment into equipment for DDH.  I would not look at EBITDA for DDH given "D" will represent an ongoing cash outflow if the fleet capacity is to be maintained.  So the cost of entry is a potential barrier to entry for competition - any sort of drilling rig is not cheap.

Then you need to get the rig to where it is needed.  Most drilling is in WA, so there is a risk of smaller guys carving out a niche with older or less capable equipment in certain locations.  That might work for some of the smaller exploratory miners, but not the big boys IMO.  Page 40 of the prospectus talks about the competition - there are a number of smaller competitors with 10 or fewer rigs.  And page 54 has examples of long term drilling contracts with some of the big boys like BHP, RT etc.  DDH has a history of being an aggregator in the industry and I expect this will continue, like DGL.

Lastly, from their prospectus: "A significant portion of the drilling services business is dependent upon obtaining work through a competitive tender process. Despite DDH1's demonstrated ability to compete effectively in the markets in which it operates, the competitive nature of the industry means that there can be no assurance that DDH1 will be able to continue to compete successfully against current or future competition."  So it is certainly not without risk.

I am curious to hear your thoughts.

[Plata]

Been looking into it a little more. Like that they have no debt. Seems to be on the low end of PE's for its industry/peers, even those of similar market cap. Surely a PE that low indicates that the market expects that this/next year will be as good as it gets for a while right? I'm sure some of it has to do with recession fears, top of economic cycle etc etc but is that all of it? Do you have any ideas as to why the market has this so lowly priced?

[Ferg]

Could be.  I'm no expert so I am also guessing.  I figure it is indicative of the current soggy state of the market and possible recession/inflation fears.  Without building a strawman argument I think fears of inflation may be misguided - any wage and fuel cost pressures should be passed on to clients, unless those long dated contracts are for a fixed price....maybe?  DDH could also be unproven in the eyes of the market given it is new to the ASX.  It may need to prove itself over a few half yearly results.

[lorraina]

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02545268-6A1101036?access_token=83ff96335c2d45a094df02a206a39ff4

[Plata]

Pretty decent update. I bought in on the way up today, hopefully FOMO doesn't catch me 

[Ferg]

A very nice update.  The major points I like from this are the overseas expansion, the on charging of consumable costs to pass on the effects of inflation, the managed growth plans and the various revenue KPIs (fleet size, utilisation, daily rates etc) are all headed in the right direction.  No apparent industry issues.  I am curious to know more about the manufacturing capabilities of Swick - that could be a game changer for avoiding costs with fleet maintenance and expansion.

[Plata]

Yes was good spotting on your part Ferg that is for sure, if I had acted quicker I would have made 20% already . Only negative I could spot was the slight contraction in underlying ebitda margin, but I had already expected some contraction there. Sadly I bought in near the top today, another FOMO lesson learnt... not too worried though as even now the price looks pretty good.

[Ferg]

Thanks Plata but someone else brought it to my attention.  I simply did a bit of research on them and posted what I found.  That person is active here and is free to out themselves if they want.  I too noticed the reduced EBITDA % and per my skim read of the release I believe this was explained by DDH being caught between inflation affecting costs and fixed price contracts with customers, which they are addressing.  I now wish I had bought more at recent lows but hindsight being 20/20 and all that.  It is still relatively cheap according to traditional valuation metrics so I am happy to accumulate.

[Plata]

Yeah I think it is still pretty attractive. I mean only a few months ago directors were buying at higher than the current price, they clearly thought it was good buying then. Need to get a deeper understanding of the business before I commit further, pretty reluctant to deviate too far from my ETF portfolio focus... hurts too much being wrong 

[lorraina]

DDH took over SWK.
Below I have copied part of page 5 of SWK's agm presentation of 5/11/2021.I accessed it vis www.stockmessmonster.com

https://stocknessmonster.com/announcements/swk.asx-6A1061178/


SWICK ENGINEERING
▪ Encouraging initial traction.
▪ Turning a cost centre into a profit centre has allowed a
refocus and Engineering is a more efficient internal and
external supplier.
▪ Growing demand for Swick's drills has led to the
manufacturing and sale of GenII rigs to the open market, as
a means for Swick to enter new regions.
▪ Ramped up the division in FY21 building the team.
▪ Early inbound demand with four GenII rigs sold to two
global drilling contractors for use in Canada and Tanzania.