RE: CAPD tipped in the IC overnight....."inexplicably cheap"6 Jan 2023 11:08
Here's the full tip - part one:
Https://www.investorschronicle.co.uk/ideas/2023/01/05/capital-limited-in-name-only/
"INVESTMENT IDEAS
Capital Limited in name only
The drilling services company is under the radar, growing well and inexplicably cheap
January 5, 2023
Name aside, it’s not hard to guess why investors might look past Capital Limited (CAPD). As an on-site services provider largely catering to Africa’s gold producers, the FTSE Small Cap index member appears to be in a cyclical sector in a high-risk geography. Its assets are rust-prone heavy drilling rigs, rather than
precious metals. And while its clients seek treasure and exposure to limitless spot markets, Capital hunts for modest margins on multi-year drilling or earth-moving contracts.
But there’s a lot more to the business than first appearances – a point you might think investors had grasped, more than a decade on from the company’s London initial public offering and seven years into a 330 per cent share price rally.
Indeed, by any measure, Capital has talked and walked like a well-managed growth company for some time, and little suggests that its trajectory is about to stop.
How then, does one account for the cheapness of its shares? Despite a lack of debt, they trade in line with book value. And despite rising sales and an expanding operating margin, they trade at less than six times forward earnings, a 40 per cent discount to peers and the stock’s own five-year average of nine. Capital’s price-to-earnings growth (PEG) ratio of less than one also suggests the past year’s share price appreciation has been overly cautious. Not that long-term investors will
have minded; had they reinvested their steadily growing dividends back into the stock, annual returns would have averaged 25 per cent since late 2017.
The answer, we would venture, is that the market has mispriced Capital’s risk premium. Let’s start with the basic mechanics of the business. Capital provides a wide range of services across the mining cycle, from the exploration phase to a mine’s development and eventual production stages. These include the leasing of equipment, geological sampling, fleet management, and drilling and earth-moving
work. Since 2019, it has offered on-site laboratory services, which allow its clients to outsource geochemical analysis and assay work to an independent, licensed contractor.
These services are provided through contracts comprising a mix of management, volume-based and per-sample fees, and are typically signed for between two and five years. But Capital’s close working relationships with its mining customers mean the group always has a clear idea of long-term spending plans, and repeat awards are
common. Contracts also contain provisions that help to shield Capital from the effects of cost inflation."
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