This falling knife could be well worth catching

capital drilling

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.

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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.

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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.

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Soros is one of the world’s most famous speculators - who sees the market as something to place highly leveraged bets on rather than invest in.

He cemented his reputation by shorting the pound on Black Wednesday in 1992, and making $1 billion from the collapse of the British currency and the near-collapse of the Bank of England.

He is another noted philanthropist, giving primarily to human rights, public health and education charities.

Slater was another highly controversial investor, known for corporate raids on public companies, and subsequent asset stripping to realise quick value for shareholders.

He also invented the phrase ‘The Zulu Principle’ to describe the importance of being a specialist when you are investing, so you can concentrate your research efforts and know more than the rest of the market about something specific.

Woodford (CBE) gained his reputation at the helm of the Invesco Perpetual Income and High Income funds, by offering relative stability and reliability in even the toughest markets.

His trademark was to make bold decisions about the companies he wanted to be invested in, and then stick with them - no matter how unfashionable his decisions were.

It led him to buy tobacco stocks in the 1990s (because he felt that concerns about the legal threats to the firms were overplayed) and avoid technology in the dotcom bubble.

Woodford currently runs Woodford Investment Management.


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