Company Overview: MACA Limited (ASX: MLD) is one of Australia’s leading diversified contracting groups, which mainly provides services to the mining and construction industries. Founded in the year 2002, MLD has transformed itself from a specialised mining and civil contracting business to a large Australian and International contracting partner of choice. The company specializes in contract mining and crushing, civil construction and infrastructure maintenance, and mineral processing solutions. MLD also provides load and haul, and drill and blast services to meet the diverse needs of its clients in different regions.

MLD Details

Long-term Outlook Supported by Enhanced Activity in Gold and Iron Ore Sectors: MACA Limited (ASX: MLD) is an international contracting group that provides services to the Mining, Infrastructure and Construction sectors. The company’s operating businesses include – Mining Australia, Crushing, Mining International, Civil Construction and Maca Interquip. As on 5 May 2021, the company had a market capitalisation of ~$290.45 million. During FY20, the company had witnessed improved performance and achieved record levels of revenue and work in hand, alongside a positive recovery in operating margins. It has continued its decent performance in H1FY21 as well and reported improved underlying results. From 2016 to 2020, the company witnessed decent growth in its work in hand position, as demonstrated in the below graph.

Work in Hand Trend (Source: Company Reports)

MLD is committed to delivering value for its existing clients while winning new work. Looking ahead, it is focused on the integration of its recently acquired Mining West business into its mining division. Further, it is focused on supporting its current operations to achieve operational excellence and driving continuous improvement to deliver operational efficiencies. The company’s decent work in hand position of $3.3 billion as at 31 December 2020 provides it with a diversified platform for growth with a tenure of one to eight years.

Decent Growth in H1FY21 Revenue: For H1FY21, the company reported total revenue of $467.2 million, up by 28.5% on the previous corresponding period (pcp). EBITDA on an underlying basis stood at $69.6 million, up 18% on pcp. For H1FY21, the company has paid an interim dividend of 2.5 cents per share. Over the period, the company’s statutory results were impacted by a number of one-off items including, foreign exchange losses and operational closure costs. Underlying net profit after tax stood at $19.7 million for H1FY21. Over the period, the company continued its work with long-term client Regis Resources at their Duketon South and North open pit gold projects. MLD also continued its work at Ravensthorpe Nickel Project with First Quantum Australia Nickel Pty Ltd. As at 31 December 2020, the company had decent liquidity, with cash of $122.8 million and net debt of $90.8 million.

H1FY21 Results (Source: Company Reports)

FY20 Results Highlights: For FY20, the company had delivered a record revenue of $808 million, up 21% on FY19. Further, the company had reported net profit after tax (pre impairment & forex) of $29.1 million, up 30% on FY19. The company’s civil and infrastructure operations performed decently in FY20, underpinned by a number of key projects, including the Karratha / Tom Price road for Main Roads WA, the General Earthworks, Camp Expansion and Road Construction for FMG Iron Bridge and many more. Over the year, MLD continued its contract mining operations for Regis Resources at the Duketon South and Duketon North operations. For the full year, the company had paid total dividend of 5 cents per share, up from 4.5 cents per share in FY19.

FY20 Results (Source: Company Reports)

Key Metrics: The company had reported improved profitability margins in FY20, as compared to FY19, due to improved financial performance over the period. Gross margin for FY20 stood at 5.7%, up from 2.9% in Fy19. EBITDA margin for FY20 stood at 11.9%, up from 7.0% in FY19. Current ratio for FY20 stood at 1.52x, down from 1.91x in FY19.

Profitability Metrics & Liquidity Profile; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 28.34% of the total shareholding while the top four constitutes the maximum holding. Schroder Investment Management (Australia) Ltd. and Kamon (Kenneth Rudy) are holding a maximum stake in the company at 5.77% and 5.47%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Adaman Resources Update: MLD’s 60% owned subsidiary MACA Interquip Pty Ltd is responsible for the maintenance of Adaman Resources Pty Ltd’s processing plant at the Kirkalocka Gold Project. MACA Interquip also provides mill installation and refurbishment services to Adaman. Recently on 4 May 2021, MLD notified regarding the appointment of Administrators to Adaman Resources Pty Ltd and its subsidiaries. As per MLD’s preliminary assessment, the current exposure of MACA Interquip to Adaman at the time of appointment of Administrators is around $5.9 million (on a 100% ownership basis).

Maintenance Contract with CITIC Pacific Mining: MLD recently finalised the Hire and Maintenance contract for CITIC Pacific Mining Management Pty Ltd (‘CPM’) at the Cape Preston Sino Iron magnetite project. It is expected that over a 36-month term commencing in April 2021, the contract will generate around $200 million in revenue for MLD.

Acquisition of Mining West Business Completed: In February 2021, MLD completed the acquisition of the Mining West business from Downer EDI Limited. MLD has paid $109 million to Downer and will pay an additional $66 million in deferred consideration through 12 equal monthly instalments of $5.5 million commencing in February 2021. The Mining West business is comprised of four large contracts at the long-life assets of Karara (Ansteel), Eliwana (Fortescue Metals Group), Cape Preston (Citic Pacific) and Gruyere (Gold Fields, Gold Road Resources). The acquisition is expected to be EPS accretive in FY21. The acquisition also provides MLD a very meaningful addition of a large-scale mining fleet.

Change of Directors’ Interest: On 4 May 2021, one of the company’s Directors, Michael Sutton, who holds an indirect interest in the company acquired 35,408 ordinary shares of the company for a total consideration of $29,388.64 via on-market purchase.

Key Risks: The company is exposed to the risks related to the failure of obtaining contracts, delays in awards of contracts, cancellations or terminations of contracts, delays in completion, changes in economic conditions and the volatile and cyclical nature of commodity prices. Further, the company is also exposed to the risks and uncertainties caused by the COVID-19 pandemic.

Outlook: As a result of the acquisition of Mining West business from Downer EDI Limited, MLD now has a total contracted work in hand of over $3.4 billion, which provide a robust revenue base well past FY25. The company expects its mining division to continue its decent performance into the second half of FY21 and beyond, as the renewed focus on performance delivers results.

MLD believes that enhanced activity in gold and iron ore sectors will support the future growth of the business. In the second half of FY21, the company is focused on integrating Mining West into MACA business. MLD’s Civil & Infrastructure division is well placed to benefit from any increased or accelerated infrastructure spend. For FY21, MLD expects its revenue to exceed $1,050 million. MLD is optimistic about the outlook for FY21 and beyond, supported by its strong work in hand position. With its ongoing tendering activities, MLD is currently well placed to pursue a significant number of opportunities across both current and new projects.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 34.44% and is trading lower than the average 52-week price level band of $0.700 - $1.515, offering a decent opportunity for accumulation. We have valued the stock using the P/E 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 P/E (NTM trading multiple), considering the decent performance in H1FY21, expected growth in FY21 revenue, and modest long-term outlook. We have taken peers like Perenti Global Ltd (ASX: PRN), Emeco Holdings Ltd (ASX: EHL), and Macmahon Holdings Ltd (ASX: MAH). Considering the anticipated benefits from the acquisition of Mining West business, consistent growth in the company’s work in hand position, decent long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.900, up by 5.882% as on 5 May 2021.

MLD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.

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