Company Overview: Metarock Group Limited (ASX: MYE), listed on ASX in 2010, is a mining contractor. MYE provides mine development, mine operation and all mine support service and products to tier one mine operators and niche asset owners. Its projects include Ulan West Mine, Aquila Mine, Integra Mining Service, Broadmeadow, Grosvenor, Wambo Mine and Moranbah Mine.

MYE Details

Synergistic Agreements to Support Topline Growth:

• MYE’s subsidiary - PYBAR Mining Services Pty Ltd signed a Letter of Intent (“LOI”) with Malabar Resources Limited, which will make the latter a preferred Contractor for the Maxwell Underground Project Access Drifts (Project). The 1.3km long scope project (expected: ~$55 to ~$65 million revenue over 12 months) will commence later in CY2022.
• Mastermyne (CC) Operations Pty Ltd – its’ another subsidiary has also executed a Mining Services Agreement (MSA) with Constellation Mining Pty Ltd, a subsidiary of QCoal Group. MSA will make the company a Contract Operator at Cook Colliery. The four years contract with further two years option (~$70 million p.a. average revenue) will commence immediately.

1HFY22 Financial Highlights:

• Growing Revenue: After the transformational acquisition of hard rock mining specialist, PYBAR Mining Services, the group revenue remains on track to achieve 3.0 times over the 18 months period from FY21 – FY23. For its half-year, the revenue was up by ~62% Y-o-Y, mainly owing to the strong performance of coal contracting business.
• Improved Normalized EBITDA: With the increase in normalized EBITDA margin, MYE increased its Normalized EBITDA* by ~70% on pcp basis. Where the normalized net profit after tax increased by ~12% on pcp basis, MYE converted its statutory NPAT of ~$1.95 million to statutory net losses of ~$3.7 million in 1HFY22.

(Source: Analysis by Kalkine Group), *Normalised EBITDA – adjusted for Crinum delay and recovery costs and PYBAR transaction costs

Top 10 Shareholders:

The top 10 shareholders together form around 51.50% of the total shareholding, while the top 4 constitute the maximum holding. Rouse (Paul Spencer) and Watts (Andrew Dominic) are holding a maximum stake in the company at 11.71% and 9.36%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company closed its half-yearly accounts with the cash balance at the end of 31^st December 2021 as ~$13.2 million versus ~$24.4 million at the end of 30^th June 2021. Its Debt at the end of 1HFY22 stood at ~$86.80 million.

Cash Balance & Debt Profile (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: Travel restrictions and lockdowns due to COVID-19 might hold down its operations of mining and thereby affecting its earnings, cash flow and financial position.
• Commodity Risk: As the company’s business involves commodity prices, it might get affected by the changes in demands, currency fluctuations and commodity price differences.
• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the same could lead the business to fines, penalties, etc.
• Technology & Labor Risk: The business is quite dependent on the technology it applies and availability of labors. Hence, failure of regular upgradation and labor costs might affect the operations and profitability.

Outlook: MYE’s forward order book has grown from $1.1 billion to $1.9 billion. The company might face a slight hiccup in its revenue guidance and normalized EBITDA guidance to $450-480 million and $37-43 million, respectively, for FY22 due to the delays in Crinum production and the early transitional performance of PYBAR. However, for FY23, MYE seems hopeful in achieving revenue of $700-750 million and EBITDA of $80-95 million. To further classify, its mine operations ($45 million to $170 million), coal contracting ($240 million to $260 million), hard rock contracting ($260 million to $290 million), are expected to increase its revenue from FY22 to FY23. Moreover, the company expects its subsidiary PYBAR secured Maxwell Drifts Project to commence in FY23, which will expectedly contribute ~$55 to ~$65 million revenue over 12 months, and ~$70 million p.a. average revenue from Cook Colliery MSA.

Technical Analysis: On the Weekly chart, MYE prices are trading above the rising trend line support zone and taking support of the same. Moreover, the momentum oscillator RSI (14-period) trading near an oversold zone at ~39.581 level, which might indicate the possibility of a rebound in the stock. However, the prices are trading below the trend-following indicators 21-period and 50-period SMA, which may act as a resistance zone. An important support level for the stock, is placed at $0.64 while the key resistance level is placed at $0.76.

Stock Recommendation: The company is trading below its 52-week low-high average of $0.550 - $1.260, respectively. The stock of MYE has been corrected by ~36.65% in the past six months. In addition, the stock is trading at an EV/Sales multiple of 0.5x as compared to the industry median (Coal) of 9.1x on a TTM basis. Thus, it seems that the stock is undervalued at the current trading levels. Considering the valuation on TTM basis, decent liquidity position, increasing top line, positive normalized EBITDA margins, current trading & technical levels, recent agreements signed, decent long-term outlook, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current price of $0.685, 10:35 AM (GMT+10), Sydney, Eastern Australia, as of 11^th March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

MYE 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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