Company Overview: Macmahon Holdings Limited (Macmahon) is principally engaged in the provision of contract mining services. The Company has three operating segments: Surface Mining, Underground Mining and International Mining, which are aggregated into the Mining segment. The Mining segment operates in two principal geographical areas, including Australia and Overseas. The Mining segment provides a range of mining services for surface and underground operations, from mine development to materials delivery, which include a range of engineering services, including design, construction and on site services to deliver on client needs from the design phase to completion. The Company offers various services, including surface mining; underground mining, and plant, maintenance and engineering. Macmahon's Mining Services business provides a range of services, including drilling, shotcreting, raise drilling, shaft sinking and engineering design to various projects.
 

MAH Details

Top-Line CAGR Growth at 52.31% over FY16-19: Macmahon Holdings Limited (ASX: MAH) is involved in providing mining and consulting services to mining companies throughout Australia, Southeast Asia, and South Africa. The Group generates revenue from the provision of mining services, civil construction and rehabilitation services to mining companies in Australia and Indonesia. Revenue for services is recognized on the basis of work completed over time and billed to customers as the services were delivered to customers. The amounts billed to customers are typically due within 30-60 days from invoice date. The transaction price for each contract is based on agreed contractual rates to which the Group is entitled and may include a variable pricing element that is accounted for in accordance with the policy on variable consideration. Other income includes management fees from the joint venture partners. Looking at the historical performance, top-line and bottom-line of the company posted a decent CAGR growth of 52.31% and 200.44%, respectively, over the period of FY2016-2019. Revenue improved from $312.2 Mn in FY16 to $1,103.0 Mn in FY19, and net income improved from $1.7 Mn in FY16 to $46.1 Mn in FY19.

FY19 revenue improved by 55% on the previous year due to an increase in the company’s activity across its contract mining projects in Australia and Indonesia. Statutory net profit improved from $33.2 Mn in FY18 to $46.1 Mn in FY19. As per the FY20 guidance, revenue is expected to improve from $1.1 Bn in FY19 to $1.2-$1.3 Bn in FY20E, and EBIT is expected to improve from $75.1 Mn in FY19 to $80-$90 Mn in FY20E. 
 

Key Indicators over FY16-FY19 (Source: Company Reports)

Key Highlights of FY19 for the period ended June 30, 2019: Revenue for the period increased by 55% to $1,103.0 Mn, as compared to $710.3 Mn in FY18, mainly due to increase in the company’s activity across its contract mining projects in Australia and Indonesia. Underlying EBITDA (earnings before interest, tax, depreciation and amortization) increased by 52% to $181.4 Mn as compared to $119.2 Mn in FY18, while Underlying EBIT (earnings before interest and tax) increased by 81% to $75.1 Mn as compared to $41.5 Mn in FY18.


FY19 Balance Sheet (Source: Company Reports)

Underlying EPS for the period increased by 74% to 2.69 cps as compared to 1.55 cps in FY18. Statutory Net Profit After Tax for the period was reported at $46.1 Mn as compared to $33.2 Mn in the previous year. For FY19, the Board has approved the payment of a final dividend of 0.5 cents per share, partially franked to 30%, for which the record date will be 14 October 2019, and the payment will be made on 29 October 2019. Going forward, the company intends to pay dividends on a sustainable basis and the Board may also consider share buyback as a means of returning the cash and delivering value to shareholders.


FY19 Key Metrics (Source: Company Reports)

Cash Balance at the End of FY19 Reported at $113.2 Mn: Company’s operating cash flow (excluding interest, tax and settlement for the class action) for FY19 was reported at $125.9 Mn as compared to $101.9 Mn in the previous year, representing a conversion rate from underlying EBITDA of 69.4%. The cash flow conversion was impacted by an increase in working capital due to the delayed receipts from trade receivables, which were paid shortly after the financial year-end. EBITDA conversion would be 82.6% after including payments from customers received in the first week of July 2019.

Company’s cash on hand and net debt as on June 30, 2019, was reported at $113.2 Mn and $52.7 Mn, respectively, with gearing of 10.5%. After factoring in delayed receipts from the clients, net debt and gearing reduced to $28.7 Mn and 6.0%, respectively.


FY19 Cash Flow Movement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 51.31% of the total shareholding. Perpetual Corporate Trust Ltd. and CPU Share Plans Pty. Ltd. hold maximum interest in the company at 44.27% and 3.05%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin for FY19 stood at 57.5%, better than the industry median of 42.0%. Its quick ratio for FY19 stood at 1.26x, better than the industry median of 1.17x, indicating the company’s better liquidity position than its peer group. Its ROE has improved from 10.5% in FY18 to 10.8% in FY19.


Key Metrics (Source: Thomson Reuters)

Recent Updates:
On November 4, 2019, the company confirmed about the signing of an agreement with Newcrest for increased rates for its work at the Telfer gold project. With this development, the company now expects the Telfer contract to be cash flow positive over its remaining term as the company would be able to focus on maximising the performance of its existing business, and capitalising on growth opportunities. On June 12, 2019, the company commenced facilitated negotiations with Newcrest Mining regarding pricing for changes to the mine plan and contract programme at the Telfer gold project.

On October 1, 2019, two highly credentialed independent non-executive directors Mr Bruce Munro and Mr Hamish Tyrwhitt, joined the company’s Board. Both individuals have spent decades in the contracting industry in senior executive and director roles and are expected to bring the benefit of their industry knowledge, experience and networks to the MAH’s Board. Mr Bruce Munro had a 29-year career with Thiess, holding various executive roles including the Managing Director role from 2011 to 2015. Mr Munro is held in high regard within the mining industry and brings with him a unique and extensive experience in the mining contracting business. Mr Hamish Tyrwhitt had a 28-year career with the Leighton group (now CIMIC), culminating in his role as the Managing Director and CEO of the listed parent company, Leighton Holdings Ltd from 2011 to 2014. Mr Tyrwhitt brings with him unparalleled, global experience in the contracting business, having served as a senior executive and on the boards of large publicly listed contracting companies.

Key Risks: The company is susceptible to various risks such as changing industry and commodity cycles, failure to win new contracts, early contract termination and contract variations, project delivery risk, risks associated to margins, operations, safety, equipment and consumable availability, currency fluctuation, partner and control risk, country risk, financing risk, acquisition risk, etc.

What to Expect: Company plans to build on its current positive momentum over the next 12 months and beyond. The order book of $4.7 Bn provides it an impetus to boost the growth of the business. Moreover, there are a substantial pipeline, which includes $7 Bn of potential work across more than 20 surface and underground projects covering Southeast Asia and Australia for new and existing clients. Close to $4.5 Bn worth of these opportunities are mostly from the existing clients. Around $1.5 Bn of this tender pipeline is expected to be awarded over the coming twelve months.

The company is well-positioned with a strong balance sheet and is on track to deliver the financial year 2020 guidance of revenue between $1.2 to $1.3 Bn and underlying EBIT of between $80 to $90 Mn. The guidance is underpinned by $1.2 Bn of secured work in the financial year 2020.


FY20 Revenue and EBIT Guidance (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Enterprise Value to Sales based Valuation

Enterprise Value to Sales based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company generated a positive return of 10.00% in the span of six months and posted a decent return of 22.22% over one-month period. Company’s top-line grew by 55% on the previous year, while EBITDA was up 52% on FY18. It held a decent cash balance of $113.2 Mn at the end of FY19. The acquisition of GBF, $4.7 billion order book, and a significant tender pipeline indicate that the company is well-positioned to deliver future earnings and cash flow growth in FY20, underpinned by the continued investments in innovation and technology, improving operational and human resource capacity, etc. Looking at the business prospects over the long-term, we have valued the stock using a relative valuation method, i.e., Enterprise Value to Sales multiple, and arrived at a target price of low double-digit growth (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$0.220 per share on November 13, 2019.

 
MAH Daily Technical Chart (Source: Thomson Reuters)

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