Company Overview: MACA Limited (ASX: MLD) is a diversified 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. MLD also provides load and haul, and drill and blast services to meet the diverse needs of its clients in different regions. Under its mining business, MACA delivers effective mine to mill solutions by utilising modern equipment and operating techniques.

MLD Details

Record Work in Hand Position to Drive Future Growth: MACA Limited (ASX: MLD) is Australia’s leading diversified contracting group that mainly provides services to the mining and construction industries. The company specializes in contract mining and crushing, civil construction and infrastructure maintenance, and mineral processing solutions. Despite the challenging operating conditions caused by the COVID-19 pandemic, MLD reported 29% YoY growth in H1FY21 revenue and 7% YoY growth in H1FY21 EBITDA, demonstrating the strength and resilience of the company’s diversified operations. Over the half-year, MLD also witnessed decent improvement in its work in hand position. In February 2021, MLD completed the acquisition of Mining West business which 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).

Looking ahead, the company is focused on integrating the Mining West business into its Mining division and supporting its current operations to achieve operational excellence. Further, the company is focused on driving continuous improvement to deliver operational efficiencies. Due to enhanced activity in the gold and iron ore sectors, MLD expects growth in its mining division. MLD’s Civil & Infrastructure division is well placed to benefit from any increased or accelerated infrastructure spend. With a record work in hand position of $3.3 billion as at December 2020 and decent prospects across all its business units, MLD seems well placed to grow both revenue and profitability.

Revenue Trend (Data Source: Analysis by Kalkine Group)

Decent Revenue Growth in H1FY21: For H1FY21, the company reported total revenue of $467.6 million, up by 29% on the previous corresponding period (pcp). Notably, 61% of the total revenue was contributed by the Mining Australia division. During H1FY21, MLD continued its work with long-term client Regis Resources at their Duketon South and North open pit gold projects. EBITDA for H1FY21 stood at $58.4 million, up 7% on pcp. Due to the number of one-off items including, foreign exchange losses and operational closure costs, MLD’s net profit declined by 3% YoY to $11.6 million. The company ended H1FY21 with cash of $122.8 million and net debt of $90.8 million. As at 31 December 2020, the company had record work in hand position of $3.3 billion underpinned by major mining and crushing wins, as demonstrated in the below image.

Work in Hand Position (Source: Company Reports)

Key Metrics: For H1FY21, the company reported ROE of 4.3%, up from -4.7% in the H2FY20. Net margin for H1FY21 stood at 3.2%, up from -3.4% in H2FY20. Current ratio for H1FY21 stood at 1.59x. Cash cycle for H1FY21 stood at 73.2 days in H1FY21, down from 81.7 days in H2FY20 and 114.7 days in H1FY21.

Net Margin (Data Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 31.12% of the total shareholding, while the top four constitutes the maximum holding. Dimensional Fund Advisors, L.P. and Schroder Investment Management (Australia) Ltd. are holding a maximum stake in the company at 6.02% and 5.77%, respectively, as also highlighted in the chart below:        

 (Data Source: Analysis by Kalkine Group)

Acquisition of Mining West Business:  In February 2021, MLD completed the acquisition of the Mining West business from Downer EDI Limited, providing MLD a very meaningful addition of a large-scale mining fleet. Notably, Mining West contributed around $0.9 billion of work in hand to MLD’s existing portfolio. MLD has concluded negotiations on contract terms in relation to a three-year extension at Cape Preston for c.$200m, with the final contract award subject to finalisation of documentation and internal client approvals.

Adaman Resources Update: Through its 60% owned subsidiary, MACA Interquip Pty Ltd, the company provides maintenance services to Adaman Resources Pty Ltd’s processing plant at the Kirkalocka Gold Project. MACA Interquip also provides mill installation and refurbishment services to Adaman. 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).

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic as it could cause temporary suspension of operations and could also impact the company’s operating environment. The company is also exposed to the risks related to the failure of obtaining contracts, delays in awards of contracts, cancellations or terminations of contracts, delays in work completion, changes in economic conditions and the volatile and cyclical nature of commodity prices.

Outlook: Due to decent work in hand position, MLD is optimistic about the outlook for FY21 and beyond. Notably, the company’s pro forma revenue run rate (including Mining West) is now $1.2 billion. MLD expects its FY21 revenue to exceed the guidance of $1,050 million. 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.

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 25.5% and is trading lower than the average 52-week price level band of $0.759 - $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 median P/E (NTM trading multiple), considering the expected benefits from the recent acquisition of Mining West business, growth in the company’s work in hand position and modest long-term outlook. We have taken peers like Emeco Holdings Ltd (ASX: EHL), Perenti Global Ltd (ASX: PRN), and Macmahon Holdings Ltd (ASX: MAH). Considering the decent revenue and EBITDA growth in H1FY21, major mining and crushing wins in H1FY21, growth expected in the mining division, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.850, down by 0.585% as on 16 June 2021.

MLD Daily Technical Chart, Data Source: REFINITIV

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

Note 2: 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.

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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