This falling knife could be well worth catching

Harvey Jones suggests making a grab for Capital Drilling plc (LON: CAPD) after it swung back into profit this morning.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When a knife starts falling, it can have a surprisingly long way to fall. Even signs of a turnaround won’t persuade investors to risk their fingers. But there are big rewards for those who get their timing right.

Driller killer

Capital Drilling (LSE: CAPD), which provides drilling teams and equipment to mining operations in emerging and developing markets, has plunged since its shares peaked at 66p in January. Today, it trades at just 40p. I reckon this could be a buying opportunity because despite recent slippage the company’s results have been heading in the right direction this year.

Investors were cheered by news in February that Capital Drilling had cut its after-tax net loss from $10.2m to $4.8m, with revenues rising 19% to $93.4m. Last month, its half-year trading update trailed a substantial 49% year-on-year rise in revenues to $62.3m, marking its strongest first half since 2013. However, that hasn’t stop the share price from trailing away in recent weeks.

Capital return

Capital Drilling, which has a market cap of £52.07m, published half-year results for the period to 30 June this morning, with the positive news that it has now swung back into profit. This was primarily driven by a 40% increase in fleet utilisation rates to 56% year-on-year, with the average revenue per operating rig jumping from $175,000 to $191,000. Revenues bounced 49.04% from $41.7m to $62.3m, while EBITDA was up 59% to $11.6m. Net profit after tax was $2.6m against a loss of $0.8m last time.

Executive chairman Jamie Boyton hailed its improved fleet utilisation rate, revenue and profit growth, which he said were underpinned by improved market conditions: “While the initial uplift in activity was associated with predominantly gold and speciality metals companies, this has broadened over H1 2017 with an improving outlook in industrial metals, particularly copper.” 

Gold mining

Boyton said that capital markets continue to underpin junior miners and explorers, supporting increased exploration and development expenditure, while the company was boosted by two new long-term contract wins at the Tasiast Mine in Mauritania and the Syama Mine in Mali. 

However, he warned that legislative changes in Tanzania are causing concern and uncertainty, which may impact exploration and investment in the country “for the foreseeable future.” Although this is consistent with previous guidance, this may explain the lukewarm market response to today’s otherwise upbeat results.

Cash flows

The share price is down 2.53% at time of writing, as the results fail to revive recent waning investor enthusiasm so far. However, I can see plenty of positives to dig into, with Boyton reporting the firm in excellent financial health and generating solid free cash flow. “This strong cash generation, coupled with enhanced discipline around capital expenditure, has seen the Group end the period with net cash of $3.3m,” he said.

Capital Drilling has declared an interim dividend of 0.5 cents per share for the first half, up from 1.5 cents last year. This is a small company in a risky area, but with City analysts forecasting a 19% rise in earnings per share in 2018 this falling knife looks tempting.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »