Company Overview: Macmahon Holdings Limited (ASX: MAH) is mainly involved in providing a complete package of mining services to miners throughout Australia and Southeast Asia. The company’s underground mining capabilities range from total mine development and production to specialised services to meet the short and long-term requirements of its clients. The company also provides its clients a full range of surface mining services, including drill and blast, bulk and selective mining, crushing and screening, train loading and the use of a large range of mining equipment.

MAH Details

Financial Growth Backed by Operational and Financial Efficiencies: Macmahon Holdings Limited (ASX: MAH) is a leading mining contractor with extensive experience in surface and underground mining. The company provides a complete package of mining services to miners throughout Australia and Southeast Asia. The company’s strategy is to maintain its financial strength, invest in growth and return cash to shareholders. Despite the increased market uncertainty in FY20, the company had reported revenue growth of 25.1% (YoY) and statutory profit growth of 40.9% (YoY), demonstrating the resilience of the company’s strategy and business offering. From 2016 to 2020, the company’s revenue and statutory NPAT grew at a CAGR of 45.01% and 148.57%, respectively, supported by operational and financial efficiencies.

Revenue and NPAT Performance Trend (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Looking ahead, the company is focused on disciplined capital management and is targeting all capital expenditure to achieve at least a 15% return on capital employed over the contract life. In FY21, the company’s priority is on delivering FY21 contracted work, securing additional contract expansions, and diversifying earnings in civil, underground, engineering and rehabilitation businesses. With an order book of around $4.2 billion, tender pipeline of ~$7 billion, and a healthy balance sheet, the company is well placed for long-term growth.

Decent Growth in H1FY21 NPAT: For the six months ended 31 December 2020, the company reported revenue of $652.5 million, down by 5% on the previous corresponding period (pcp), due to a change in accounting treatment on certain client provided consumable items at Batu Hijau. The company’s underlying EBITDA increased by 6% to $121.2 million in H1FY21, reflecting an increase in activity across the company’s operations. Over the period, the company generated operating cash flow (excluding interest, tax and M&A costs) of $96.7 million, representing a conversion rate from underlying EBITDA of 79.8%. Statutory NPAT for H1FY21 stood at $44.8 million, up 56% on pcp. For the half-year period, the company declared an interim dividend of 0.30 cents per share, representing a 20.7% payout ratio, which is in-line with the Company’s current dividend policy payout range of 10 - 25%. The interim dividend will be partially franked (20%) and has a record date of 17 March 2021, and a payment date of 7 April 2021. As at 31 December 2020, the company had a gearing of 20.0%, cash on hand of $148.4 million, and net debt of $129.0 million at 31 December 2020.

Revenue and Underlying EBITDA Trend (Source: Company Reports)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported revenue of $1.38 billion, up 25.1% on FY19, driven by the increased activity across the Company’s projects in Australia and Indonesia from predominantly Gold and Copper/Gold operations. Further, the company reported underlying EBITDA of $238.7 million, up 32% on FY19. During FY20, MAH generated a record operating cash flow of $218.4 million, representing a conversion rate from underlying EBITDA of 91.5%.

FY20 Results (Source: Company Reports)

Key Metrics: Despite the market uncertainty in FY20, the company’s profitability margins have improved over the previous year, demonstrating the resilience of the company’s strategy and business offerings. For FY20, the company’s gross margin stood at 58.5%, up from 57.5% in FY20. EBITDA margin for FY20 stood at 16.5%, up from 15.1% in FY19. Current ratio for FY20 stood at 1.50x, up from 1.45x in FY19.

Past 5-year Financial Performance for Year Ending 30 June 2020; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 58.25% of the total shareholding while the top four constitutes the maximum holding. Perpetual Corporate Trust Ltd. and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 44.27% and 6.52%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Mining Contractor for Gwalia Underground Gold Project: In an update provided on 3^rd March 2021, the company confirmed that it has been selected by St Barbara Limited (ASX: SBM) to provide all underground mining services to the Gwalia underground gold project in Western Australia from May 2021. This new contract will make an important contribution to the company’s strategic objective to diversify and expand its underground business. The initial contract term will be for 5 years; however, St Barbara has an option to extend for a further 3-year period. It is expected that MAH will generate around $500 million in revenue over the initial 5-year term of the contract, which will require a capital expenditure of circa $40 million over FY21 and FY22.

Secures $220 million Contract at Deflector Underground Mine: On 12 February 2021, the company announced that its underground mining division has been awarded a 4-year contract with Silver Lake Resources (ASX: SLR) to conduct mining works at the Deflector gold and copper mine in Western Australia. This contract is expected to generate approximately $220 million in revenue for the Company until April 2025.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic as it has resulted in closure of borders, disrupted trade and various industries, including mining, interrupted supply chains and created significant uncertainty in the global economy. As gold and copper are the two most important commodities contributing to MAH’s order book and tender pipeline, the company is exposed to the risk associated with the changes in these commodity prices. MAH is also exposed to fluctuations in the value of the Australian dollar versus other currencies due to international operations.

Outlook: Due to high commodity prices and supportive capital markets, the outlook for the resource sector seems robust. As a result of this, the company’s focus is on converting more opportunities to drive growth into FY22 and beyond. MAH intends to leverage off its competitive advantage of being able to service both surface and underground mining concurrently and expand its service offering across the mining value chain. With a current tender pipeline of approximately $7 billion, MAH is optimistic about the longer-term growth prospects. The company expects its cash conversion to improve further in the second half of FY21, in-line with its full-year target of 85%. In FY21, the company expects its revenue to be between $1.3 billion– $1.4 billion and EBIT(A) to be in the range of $90 million –$100 million. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 15.99% and is trading is lower than the average 52-weeks price level band of $0.140 and $0.300, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of $0.18 and resistance of $0.26. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average EV/Sales (NTM Trading multiple), considering its high commodity prices, supportive capital markets, and robust resource sector outlook. We have taken peers like Emeco Holdings Ltd (ASX: EHL), MACA Ltd (ASX: MLD), Monadelphous Group Ltd (ASX: MND), etc. Considering the company’s decent H1FY21 results, recently announced mining contractor for Gwalia underground gold project, decent outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.210, down by 4.546% as on 3 March 2021.

MAH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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