Capital Ltd on the cusp of a meaningful equity re-rating, says Berenberg

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Capital Limited (LON:CAPD) is “on the cusp of a meaningful equity re-rating”, analysts at Berenberg believe, with growth potential from its core drilling business and the fledgling contract mining business.


The German bank issued a note exploring three scenarios: growth in utilisation rates for the drilling business, the winning of two US$40mln-per-year mining contracts; and a ‘dare to dream’ scenario combining both of these scenarios.


A mixture of a high gold price and improving capital markets are “pointing to a repeat of previous cycle highs” for Capital’s drilling business, in which case this could see utilisation rates increase from around 60% closer to 75% with limited capital investment.


If so, this would results in Berenberg’s revenue forecasts for 2021-22 increasing 24%, underlying profit (EBITDA) by 36% and free cash flow by 61%.


The Capital Mining contract mining business, meanwhile, “has the potential to meaningfully change the investment case”, analyst Richard Hatch wrote, after the company said in last month’s result that this arm was “engaging in a number of large tendering opportunities, with an improved tendering pipeline across all business units”.


Winning two US$40mln contracts with a 20% EBITDA margin would increase 2021-25 revenues by around 52% and EBITDA by circa 45%.


With management having begun investing in its fleet of drill rigs, the forecast is for a first contract to require capital expenditure of US$20mln and 20% for the second contract, assuming a new fleet.


This would be expected to drive negative cash flow of US$42mln in 2021 before nearly doubling cash flow out to 2025 to US$25mln per year.


“From a position of balance sheet strength, we believe that the company has plenty of flexibility and options to fund capex for the fleet.”


Hatch said while these are only assumptions at present, “it is more than possible that our upside case becomes our base case in the near term”.


That meant that his forecasts, a ‘buy’ rating and 93p price target were all reiterated.

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