Macmahon Holdings Limited

MAH Details

Macmahon Holdings Limited (ASX: MAH) offers mining and construction services for over 55 years. It has developed capabilities in surface and underground mining, civil design and construction, performance enhancement, mine site maintenance, and rehabilitation services.

H1FY21 Performance – For the First Half Ended 31 December 2020 

For the first half ended 31 December 2020, revenue decreased by 5% YoY to $652.5 million, mainly driven by a change in accounting treatment for certain client-provided consumable items at Batu Hijau. Operational changes relating to COVID-19 have limited control of these items. As there is no margin in these consumable items, earnings have not been impacted. Excluding this charge, revenue increased ~3% across the remainder of the business. Underlying EBITDA grew 6% YoY to $121.2 million with EBITDA margin of 18.6% and underlying EBIT increased 5% YoY to $46.5 million with EBIT margin at 7.1%, indicating a rise in activity across the operations. Further, statutory net profit after tax grew to $44.8 million together with growth in underlying EBIT, margins, and operating cash flow.

Financial Snapshot (Source: Company Reports)

Recent Update

As per the release dated 22 June 2021, Red 5 Limited (ASX: RED) has awarded the King of the Hills Mining Services contract to Macmahon Contractors Pty Ltd (a subsidiary of MAH). Notably, the contract award follows the completion of the thorough competitive tender process in late 2020 for the open pit as well as underground mine contracts and encompasses the combined mining operations at KOTH.

Outlook

The company continues to maintain its EBIT guidance of $90-$100 million, which refers to a rise in AUD:USD assumption from 0.72 to 0.75. Further, the revenue is forecasted to be in the ambit of $1.3-$1.4 billion, restated from $1.4-$1.5 billion previously. In line with this, its order book as of 31 December 2020 excluding the Batu Hijau revenue adjustment was ~$4.17 billion that includes $322 million of new work (Foxleigh and other contract win). On the back of the award of a new contract, extension at Deflector, and finalization of the Warrawoona contract, the order book is expected to be $4.21 billion, indicating strong revenue inflows in future periods.

Key Risks

The financial outlook of the company is partly dependent on the outcomes at the Batu Hijau project, as this project requires agreements to be reached about certain matters on a periodic basis, including annual performance targets. Further, the business relies on several individual contracts and business alliances with small number of key long-term customers and business relationships with a few organisations. In addition to this, the financial performance is also influenced by the level of activity in the resources and mining industry.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has been trading in a down trend. Following the existing trend, it has given a weaker close for the ongoing week at $0.175. The technical indicator RSI with a reading around 35 suggests weaker momentum for the stock.

Going forward, the stock may have resistance around the 61.8% retracement level of $0.197 whereas support could be around the lower Bollinger band of $0.165.

Stock Recommendation

MAH has delivered 6-month and 9-month returns of ~-32.6% and ~-28.5%, respectively. It has made a 52-week low and high of $0.173 and $0.285, respectively.

We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price which reflects the rise of low double-digit (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM trading multiple) considering recent award wins, strong order book and decent operating margins. We have taken peers like Perenti Global Ltd. (PRN.AX), MACA Ltd. (MLD.AX), Monadelphous Group Ltd. (MND.AX).

Considering the strong management outlook, decent financial guidance, the current trading levels, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.175 per share on 23^rd June 2021.

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.

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.

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