Company Overview: Macmahon Holdings Limited (ASX: MAH) is a leading mining contractor with extensive experience in providing both surface and underground mining services for resources projects across a range of locations and commodity sectors. The company’s underground mining division offers a broad range of ground support services, as well as services to facilitate ventilation and access to underground mines, including shaft sinking, raise drilling and shaft lining. The company’s surface mining division offers a broad range of services, including mine planning, drill and blast, bulk and selective mining, crushing and screening, water management as well as equipment operation and maintenance.

MAH Details

Decent Order Book and Tender Pipeline of Opportunities to Drive Future Growth:

• Strategic Focus on Winning New Work: The company’s strategy is focused on winning new work in its existing markets, while diversifying its business across a range of commodities, clients and geographies.
• Capitalise on Tender Pipeline: MAH intends to grow and diversify its market share and capitalise on a $7.0bn tender pipeline.
• Expanding Service Offering: With continued investment in people, mining technology and ongoing digital transformation, the company seems well placed to expand its service offering across the mining value chain and optimising the safe delivery of its order book.

Key Takeaways from H1FY21 Results:

• Decline in Revenue: MAH reported revenue of $652.5 million in H1FY21, down by 5% on pcp, mainly due to the change in accounting treatment on certain client provided consumable items at Batu Hijau.
• Rise in Underlying EBITDA: The company’s underlying EBITDA increased by 6% YoY to $121.2 million in H1FY21, reflecting an increase in activity across the company’s operations.
• Rise in Dividend: For the half-year period, the company paid an interim dividend of 0.30 cents per share, up by 20% on pcp, representing a 20.7% payout ratio.
• Cash and Debt Scenario: 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.

Reported NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics:

MAH witnessed improved profitability margins during H1FY21, as compared to H1FY20, as a result of increased activity across the company’s operations. For H1FY21, MAH reported gross margin of 63%, up from 56.8% in H1FY20. Net margin for H1FY21 stood at 18.1%, up from 16.2% in H2FY20. Current ratio for H1FY21 stood 1.56x, up from 1.26 in H1FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 59.09% 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:

(Source: Analysis by Kalkine Group)

Latest Developments:

• Change of Directors’ Interest: On 24 June 2021, one of the company’s Directors, Vyril Vella, who holds indirect interest in the company, acquired 200,000 shares for a total value of $35,500 via on-market update.
• Awarded Services Contract for KOTH Gold Project: On 22 June 2021, MAH was awarded a 5-year open pit and underground mining services agreement by Red 5 Limited (ASX: RED) for the King of the Hills (KOTH) Gold Project in Western Australia.
• Selected as Mining contractor for the Dawson South Mine: On 30 March 2021, MAH announced that it has finalised 3-year surface mining contract with Anglo American to provide surface mining services Dawson Mine in Queensland at the Dawson South operations. It is expected that this contract will generate around $200 million in revenue over the 3-year term.

Key Risks:

• Fluctuations in Commodity prices: 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.
• COVID-19 Uncertainties: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic as it has resulted in the closure of borders, disrupted trade and various industries, including mining, interrupted supply chains and created significant uncertainty in the global economy.
• Foreign Currency Risk: MAH is also exposed to fluctuations in the value of the Australian dollar versus other currencies due to international operations.

Outlook: With a pro-forma order book of $4.2 billion, tender pipeline of ~$7 billion, and a healthy balance sheet, the company is well placed for long-term growth. In FY21, the company expects its revenue to be $1.3 billion – $1.4 billion. Further, the company expects its EBIT(A) to be between $90 – $100 million. MAH expects its cash conversion to improve further in the second half of FY21, in-line with its full year target of 85%.

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

Source: 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 six months, the stock has corrected by 24.5% and is trading lower than the average 52-week price level band of $0.170 and $0.285, offering a decent opportunity for accumulation. 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 supportive capital markets, modest outlook, and decent order book. We have taken peers like MACA Ltd (ASX: MLD), Monadelphous Group Ltd (ASX: MND), and Perenti Global Ltd (ASX: PRN). Considering the company’s decent financial performance in H1FY21, pipeline of opportunities, decent order book, tender pipeline, modest outlook, current trading level, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.195, as on 7 July 2021, 1:05 PM (GMT+10), Sydney, Eastern Australia).

MAH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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