Company Overview: Macmahon Holdings Limited (ASX: MAH) is a diversified contractor mainly involved in providing a complete package of mining services to miners throughout Australia and Southeast Asia. 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. 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.

MAH Details

2021 AGM Highlights: On 22 October 2021, MAH held its 2021 Annual General Meeting (AGM), wherein, the management highlighted that during FY21 the company secured $2 billion of new work for the business, which has increased the scale of its underground business and expanded its civil presence into Western Australia. Some of the key points highlighted in 2021 AGM are as follows:

• Improved Earnings in FY21: For FY21, MAH reported record underlying EBITDA of $250 million, up ~5% on the previous year. The underlying operating cash flow for FY21 stood at $269 million, representing a conversion rate of 108% of underlying EBITDA.
• Rise in Dividend: For H2FY22, MAH has paid a final dividend of 0.35 cents per share, bringing the total dividend for FY21 to 0.65 cents per share, which is ~8% than the previous year, and represents a payout ratio of 18% of underlying net profit after tax.
• Strategy Update: MAH is focused on diversifying and expanding its service offering across the mining value chain, with a specific focus on lower capital services, such as civil contracting, engineering, and underground mining.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 63.9%, up from 58.5% in FY20. EBITDA margin for FY21 stood at 17.6%, up from 16.5% in FY20. Net Margin for FY21 stood at 5.7%, up from 4.7% in FY20. ROE for FY21 stood at 14.8%, up from 13.7% in FY20. Current ratio for FY21 stood at 1.24x, slightly down from 1.5x in FY20.

Profitability Margins (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 60.15% of the total shareholding, while the top four constitute the maximum holding. Amman Mineral Contractors (Singapore) Pte. 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)

Update on Earn Out Payment for GBF Acquisition: In June 2019, MAH acquired GBF Underground Mining Group to expand the scale of its underground mining division. As per the acquisition agreement, GBF’s vendors will receive an earn out payment of 3x any EBITDA in FY21 above an agreed hurdle, less any increase in the net debt required to fund that earnings growth. As per the update on 25 October 2021, MAH has determined an earn out of $23.5 million under the purchase agreement.

CFO Transition: On 8 October 2021, MAH’s Chief Financial Officer (CFO), Peter Pollard, announced its retirement from CFO role to enable him to spend more time with family in Melbourne. The company’s Deputy CFO, Ursula Lummis, will assume the CFO role from Peter.

Key Risks:

• Skilled Labour Shortage: The company is exposed to the risks related to the shortage of skilled labour, caused by various border restrictions.
• Foreign Currency Risk: Due to its international operations, MAH is exposed to fluctuations in the value of the Australian dollar versus other currencies.

Outlook: Looking ahead, the company is focused on optimising its current projects and winning strategically aligned new projects and expansions, which will enhance its group margins. Considering the ongoing positive momentum in MAH’s underground business and with recent contract awards, including the Gwalia and King of the Hills projects, MAH expects continued growth in the underground business over the next two years. For FY22, the company expects its underlying EBIT(A) to be in between $95 – $105 million. Further, the company expects its revenue to be in the range of $1.4 billion to $1.5 billion. Over the coming years, MAH expects to achieve its stated Return on Average Capital Employed target of 15% or better.

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

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 ~25.53% and is trading lower than the average 52-week price level band of $0.170 and $0.280, signifying accumulation opportunity. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the uncertainty surrounding the COVID-19 pandemic, and risks associated with the availability of skilled labour. For valuation purpose, peers such as Perenti Global Ltd (ASX: PRN), Monadelphous Group Ltd (ASX: MND), MACA Ltd (ASX: MLD), and others have been considered. Considering the improved underlying earnings in FY21, new work secured, decent outlook, current trading level, valuation and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.175, down by ~5.41% as on 1 December 2021.

MAH Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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