Canaccord Genuity initiates coverage on Capital Limited

Canaccord Genuity said it believes Capital shares were "significantly mispriced" based on the group's "strong" growth outlook and pointed to four key reasons why investors should own the stock.

Firstly, Canaccord said Capital was "a dominant player", generating premium margins, while it also noted that the group was operating in a growing market, it had a "positive outlook" for key segments, and also pointed to the company's balance sheet strength.

"Capital operates the largest drilling fleet in Africa, with approximately 116 rigs, and operates at higher margins than peers. Mining services activity is picking up significantly and is set to rise further as commodity prices incentivise exploration activity. Further, the company is using its established position to diversify into segments with positive outlooks, including contract mining and laboratory services which accounted for roughly 22% of group revenue in FY21," said Canaccord.

The Canadian bank also noted that Capital's management had positioned the company for "significant growth" and, importantly, it now expects that most growth spending can be funded from internal cash flows.

"We see Capital as a well-run, growth-focused company operating in a fragmented market which acts as a degree of protection over the company's margins. The company is trading at an EV/EBITDA of ~2.2x for FY23E and ~1.6x for FY24E, compared to a historical industry average of ~3-4x over the last few years," said the analysts.

Reporting by Iain Gilbert at Sharecast.com