Company Overview: Macmahon Holdings Limited (ASX: MAH) is a diversified contractor that provides mining services to miners across 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. MAH was listed on ASX on 1 December 1983.

MAH Details

Highlights of Macquarie Western Australia Forum: In November 2021, MAH participated in the Macquarie Western Australia forum, wherein, the management highlighted that MAH has secured $2 billion of new work in FY21, underpinning a positive outlook. Some of the other key points highlighted at the forum are as follows:

• Improved Underlying Earnings: For FY21, MAH reported underlying earnings before interest and tax (EBIT(A)) of $95.2 million, up 4% on the previous year.
• FY22 Focus Areas: In FY22, the company is focused on improving its scalability through diversifying earnings in underground and other mining support services. Further, the company is also focused on maintaining disciplined management of capital.

Key Takeaways from FY21 Results: During the year ended 30 June 2021, the company secured $37.0 million of mining support work and expanded its civil construction business into Western Australia.

• Slight Reduction in Revenue: For FY21, the company reported total revenue of $1,351 million, down by 2% on the previous year, impacted by the limited movement of specific consumables as a result of COVID-19 pandemic.
• Rise in Profitability: For FY21, the company reported statutory net profit after tax of $77.2 million, up 19% on the previous year, assisted by the recognition of a $17.3 million Deferred Tax Asset.
• 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% higher than the previous year.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: 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. Current ratio for FY21 stood at 1.24x, slightly down from 1.5x in FY20. Debt to Equity ratio for FY21 stood at 0.57x, up from 0.41x in FY20.

Profitability Margins (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 60.12% 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)

Board Changes Update: On 2^nd December 2021, MAH announced the resignation of Mr. Greg Gettingby from the post of Company Secretary. Ms. Sophie Raven, who has extensive in corporate governance of listed entities, has been appointed as the new Company Secretary of MAH.

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.

Key Risks:

• COVID-19 Uncertainties: The COVID-19 environment continues to evolve and has the potential to impact the business. The restrictions caused by the COVID-19 pandemic could impact the movement of specific consumables, which could impact the company’s operations.
• Skilled Labour Shortage: The company is exposed to the risks related to the shortage of skilled labour, caused by various border restrictions.

Outlook: Looking ahead, the company is focused on growing adjacent services to deliver higher returns. Further, the company is focused on improving its scalability through diversifying earnings in underground and other mining support services. 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.

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 ~7.31% and is trading lower than the average 52-week price level band of $0.170 and $0.280. 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 peer, considering the risks associated with the availability of skilled labour and uncertainty surrounding the COVID-19 pandemic. For valuation purpose, peers such as Perenti Global Ltd (ASX: PRN), Monadelphous Group Ltd (ASX: MND), MACA Ltd (ASX: MLD), etc., have been considered. Considering the new work secured by the company, improved profitability in FY21, decent long-term outlook, current trading level, indicative upside in valuation and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.18, down by 2.703%, as on 12 January 2022.

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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