Company Overview: Macmahon Holdings Limited (ASX: MAH) is a leading mining contractor that provides a complete package of mining services to miners throughout Australia and Southeast Asia. MAH provides its clients with a full range of surface mining services, including drill and blast, bulk and selective mining, crushing and screening, train loading and the use of a large range of mining equipment. The company’s underground mining capabilities range from total mine development and production, to specialised services to meet the short and long-term requirements of its clients.

MAH Details

Long-Term Outlook Supported by Decent Order Book and Tender Pipeline: Macmahon Holdings Limited (ASX: MAH) is a leading mining contractor that provides surface, underground, and civil mining services for resources projects across a range of locations and commodity sectors. As on 12 May 2021, the company’s market capitalisation stood at ~$463.32 million. The company’s strategy is to maintain its financial strength, invest in growth and return cash to shareholders. Despite the challenges created by the COVID-19 pandemic, MAH was able to deliver a record underlying EBITDA of $239 million and record operating cashflow of $218 million in FY20, demonstrating the resilience of the company’s strategy and business offering. From 2017 to 2020, the company’s revenue and underlying EBITDA have grown at a CAGR of 57% and 96%, respectively, supported by operational and financial efficiencies.

Past 4 Years Financial Performance; All numbers in $mn (Source: Company Reports)

Looking ahead, the company is focused on extending its order book with existing long-term clients and expanding adjacent mining services. It intends to deliver value to shareholders by increasing return on capital and by improving margins. Due to high commodity prices and supportive capital markets, the outlook for the resources sector seems robust. As a result of this, the company’s focus is on converting more opportunities to drive growth into FY22 and beyond. With a pro forma order book of $4.2 billion, tender pipeline of ~$7 billion, and a healthy balance sheet, the company is well placed for long-term growth.

H1FY21 Result Highlights: Due to a change in accounting treatment on certain client provided consumable items at Batu Hijau, the company’s revenue declined by 5% YoY to $652.5 million in H1FY21. The company’s underlying EBITDA increased by 6% YoY to $121.2 million in H1FY21, reflecting an increase in activity across the company’s operations. Statutory NPAT for H1FY21 stood at $44.8 million, up 56% on pcp. For the half-year period, the company paid an interim dividend of 0.30 cents per share, up by 20% on pcp, representing a 20.7% payout ratio. As at 31 December 2020, the company had a gearing of 20.0%, cash on hand of $148.4 million, and net debt of $129.0 million.

Revenue and Underlying EBITDA Trend (Source: Company Reports)

FY20 Result Highlights: During FY20, the company witnessed 25.1% YoY growth in its revenue to $1.38 billion, driven by the increased activity across the company’s projects in Australia and Indonesia from predominantly Gold and Copper/Gold operations. Over the year, MAH generated a record operating cash flow of $218.4 million, representing a conversion rate from underlying EBITDA of 91.5%. Further, the company reported underlying EBITDA of $238.7 million, up 32% on FY19.

FY20 Results Highlights (Source: Company Reports)

Key Metrics: As a result of increased activity across the company’s operations, MAH saw decent improvement in its profitability margins during H1FY21. For H1FY21, MAH reported gross margin of 63%, up from 60.2% in H2FY20. Net margin for H1FY21 stood at 18.1%, up from 17.5% in H2FY20. Current ratio for H1FY21 stood 1.56x, up from 1.50x in H2FY20.

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

Top 10 Shareholders: The top 10 shareholders together form around 59.21% of the total shareholding, while the top four constitutes the maximum holding. Perpetual Corporate Trust 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:

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

Selected as Mining Contractor for The Dawson South Mine: On 30 March 2021, the company announced that it has been selected by Anglo American, a leading global mining company, to provide surface mining services for Dawson Mine in Queensland at the Dawson South operations, from July 2021. It is expected that over the three-years period, this contract will generate around $200 million in revenue for the company.

Letter of Intent Received for KOTH: On 9 March 2021, the company confirmed that it has received a letter of intent in relation to the King of the Hills (“KOTH”) gold project being developed by Red 5 Limited. As per the letter of intent, MAH is expected to provide all surface and underground mining services to the project over a 5-year contract term, commencing in the first quarter of 2022. The company expects this documentation to be completed by June 2021. It is expected that this contract will add over $650 million to MAH’s order book.

Change of Director’s Interest: On 30 March 2021, one of the company’s Directors, Vyril Vella, acquired 250,000 ordinary fully paid shares for a total consideration of $49,650 via on-market trade. He now holds around 1,857,842 shares of the company.

Mining Contractor for Gwalia Underground Gold Project: In an update provided on 3^rd March 2021, the company confirmed that it has been selected by St Barbara Limited (ASX: SBM) to provide all underground mining services to the Gwalia underground gold project in Western Australia from May 2021. The initial contract term will be for 5 years; however, St Barbara has an option to extend for a further 3-year period. It is expected that MAH will generate around $500 million in revenue over the initial 5-year term of the contract, which will require capital expenditure of circa $40 million over FY21 and FY22.

Key Risks: As gold and copper are the two most important commodities contributing to MAH’s order book and tender pipeline, the company is exposed to the risk associated with the changes in these commodity prices. The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic as it has resulted in closure of borders, disrupted trade and various industries, including mining, interrupted supply chains and created significant uncertainty in the global economy. MAH is also exposed to fluctuations in the value of the Australian dollar versus other currencies due to international operations.

Outlook: In FY21, the company is focused on delivering FY21 contracted work, securing additional contract expansions, and diversifying earnings in civil, underground, engineering and rehabilitation businesses. The company intends to maintain disciplined management of capital and invest in mining technology and digital transformation. The company expects its cash conversion to improve further in the second half of FY21, in-line with its full-year target of 85%. In FY21, the company expects its revenue to be between $1.3 billion–$1.4 billion and EBIT(A) to be in the range of $90 million–$100 million. 

Valuation Methodology: EV/Sales 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 17.99% and is trading is lower than the average 52-weeks price level band of $0.180 and $0.287, offering investors a decent opportunity for accumulation. We have valued the stock using an EV/Sales 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 some premium to its peer average EV/Sales (NTM trading multiple), considering supportive capital markets, robust resource sector outlook, and decent company outlook. We have taken peers like MACA Ltd (ASX: MLD), Monadelphous Group Ltd (ASX: MND), Perenti Global Ltd (ASX: PRN), etc. Considering the company’s improving bottom-line, decent order book, tender pipeline, modest long-term outlook, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.205, down by 4.652% as on 12 May 2021.

MAH 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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