Scroll down - latest update is at the end...

Huge tender pipeline of $7b (as at 12-Jun-19) and MAH have already been named as preferred tenderers for $5b of that $7b. They have provided positive FY20 guidance which is based only on work already secured. The $7b pipeline represents additional upside. Currently down on concerns over Newcrest's Telfer and Dacian's Mt Morgans contracts, but these are both minor issues in the overall scheme of things. Still looks undervalued to me. Initial target is 25c, but could go well above that if they win plenty more work. Solid balance sheet. Low debt. Making some sensible acquisitions. Excellent management.

Forager's Australian Shares Fund (ASX:FOR) has MAH as one of their largest holdings.

22-June-2019: I've just increased my Target Price for MAH from 25c to 30c, which is Moelis Australia's current TP for MAH (see link to their report in the #Broker/Analyst Reports straw). I see the GBF acquisition as positive, and it gives MAH more underground gold mining expertise as well as a presence in the Kalgoorlie Goldfields region. The majority of MAH's revenue is from either gold mining or copper/gold mining contracts now, and I see a positive future for the gold mining industry in Australia, especially in the short to medium term. I do own a number of gold mining companies directly, but I also like playing the better services providers to industries with positive tailwinds. MAH is certainly one of those.

24-Dec-2019: That was all written around 6 months ago or longer - However, upon reflection, I still think 30c is a good target price (TP) for MAH. The Telfer contract dispute has been sorted out and Macmahon will be making some money there now instead of losing it. They won't be making heaps, but at least they won't be going backwards there any more just to prop up Newcrest's worst Australian gold mine. The Dacian contract is also no longer a problem, and they have a heap of other contracts that are performing very well, so we've seen MAH's SP rise up to now be at 29c, only 1 cent off my 30c TP, and they got below 16c in August, so they've almost doubled from there. Above 30c, I may start to take some profits.

23-June-2020: Time to update this valuation. However, the investment thesis remains unchanged, and so does my valuation/target price (TP). I'd still be trimming MAH above 30c, unless they announce some more significant new contract wins, in which case I'll raise that TP once again. No need for concern with MAH. Very well run, exposed to the gold mining industry (most of their clients mine gold). Very well incentivised management. Smart money on the register. A real winner in the sector.

22-Dec-2020: Update: All good. No change. Still worth 30cps IMO.

22-June-2021: Update: Still good. I still hold them. FOR still hold them. Being smashed currently on tax loss selling. Recently won the big Gwalia underground mining contract (work formerly provided to SBM by Byrnecut) and there have been teething issues with the contract commencement there due to lack of experienced workers to fill those rolls - but that's temporary and happens during every mining boom. While margins have certainly reduced and the money isn't as easily made as it was during prior boom periods, due to mining companies now demanding more bang for their bucks, MAH is one of the best, most of their clients are either gold miners or copper/gold miners, and I see these current levels (below 20 cps) as a great opportunity to top up my MAH positions (across the two RL portfolios in which I hold them). My 6-month PT for MAH is 23 cps, my 12-month PT is 26 cps, and my 2-year PT is 30 cps. That's good upside from here if I'm right.

21-Dec-2021: Update: Well, they did take out my 6-month PT of 23 cps - back in August, before falling back, then they tagged it very briefly in September, but they're now hovering around 18 to 19 cps, very similar levels to 6 months ago when I wrote that paragraph immediately above this one. Nothing concerning really. Just not a sector that the market is keen on at this point. If you want exposure to the gold mining sector through a services provider, then it's hard to go past Macmahon (MAH). The majority of their clients are gold miners, and they do contract mining for a number of Australian gold miners, big and small, like Newcrest (NCM), Regis (RRL), Dacian (DCN), Red 5 (RED), Silver Lake (SLR), St Barbara (SBM), Calidus (CAI) and Bellevue Gold (BGL), plus AngloGold Ashanti (who are a South African gold miner who own 70% of the Tropicana gold mine in Western Australia).

Those three coal contracts there are all Met (Metallurgical) Coal, not Thermal/Energy Coal, which is a positive. Metallurgical coal is an essential ingredient in the production of steel, one of the most widely used building materials on earth. It takes around 770 kilograms of coal to make one ton of steel with approximately 70 per cent of global steel produced in basic oxygen blast furnaces. However, it's the exposure to leading gold miners that interests me. It's like a pick and shovel play on gold, although MAH don't sell the picks and shovels, they actually do the picking and shovelling, using large machines, so it's not a true pick and shovel play so much as a services play, mining services in this case, but the benefits are the same, in that you get exposure to the commodity without having to worry about commodity price fluctuations.

Interestingly, in a recent (November 2021) Presentation at the Macquarie Conference in WA, Macmahon were pointing out how the skilled worker shortage in the mining industry, especially in WA, isn't hurting them as much as people might imagine. They said (on slide 4), regarding Cost management:

• Contract structures provide protection against input costs, including labour:
• – ~60% of revenue is Alliance-style contracts with monthly rise and fall provisions
• – ~40% of revenue is Schedule of Rates contracts containing rise and fall provisions which are adjusted monthly, quarterly [and/or] bi-annually
• Current rates have been built into new contracts and tenders

They are in surprisingly good shape actually:

They have secured $2 billion in FY21 of new work underpinning a very positive outlook, with less capex forecast for FY22 than FY21, and maintaining double digit ROACE, as shown above.

With a $5 billion order book, including $1.4 billion of FY22 revenue already secured, plus an $8.2 billion tender pipeline, and a fair bit of that work with existing clients, they are in very good shape. Although you wouldn't think that looking at their share price graph:

Apart from Forager, who I think still hold some Macmahon, there is also Paradice on the register with 6.5%.

Macmahon's NTA per share (as at 30-June-2021) is 23.6 cps, and they closed today at 18.5cps, being a 21.6% discount to their net asset value. And that's just the tangible assets that they own, with zero value attributed to their brand and reputation, the multi-year recurring revenue contracts they have with profitable gold miners, and their future earnings potential.

Absolute bargain. And they recently started paying dividends too, which are set to increase.

There are three things putting people off I reckon.

One: The first is that they are a mining services company, and that entire sector is on the nose currently, with one of the underlying reasons for that being a perception that there is a skilled worker shortage and that is going to result in major cost blowouts due to having to pay much higher wages and salaries to ensure positions are filled to perform these contracts. In prior periods, such cost blowouts have resulted in contracts being loss-making, and potentially sending companies broke. Macmahon have addressed this issue, as I have mentioned above, with clauses built into contracts to allow for wage pressure - which is a cost that ultimately is borne by the mining company, not the contractor. That's how contracts are structured these days. Mining Services companies have got a lot smarter about such things.

There is also the fact that most mining companies, especially the larger ones, really tightened their belts during the bust that followed the last mining boom, and these days they demand much more competitive rates from their mining contractors. That is not new news however, it's been the case for a number of years now, and that's the environment that MAH work in, and they know it very well. In essence, gone are the days where mining contractors could charge what they like and make huge profits on every job. The ones that are still around and successful have become good at what they do, and good at knowing how to structure contracts to ensure continuing profitability.

Two: As shown in the last slide I've included above, 44.3% of MAH is owned by PT AMNT, an Indonesian company who own the Batu Hijau Project, which is Macmahon's largest single mining contract in terms of dollar value (revenue per year), and their only major contract outside of Australia now. Because it's such a large project, and such a large contract for Macmahon, and the owners of the project own 44% of Macmahon, it's worth covering here:

After that, Macmahon's next largest contract is Tropicana, where they have a life of mine (LOM) Alliance-style contract for the open pit (OP) mine and a term contract (until May 2024 unless extended) for the Boston Shaker UG (underground) mine.

However, some people might be wary of a company like Macmahon which is 44% owned by an Indonsesian mining company. There are plenty of examples of where large shareholders interests are not well aligned with those of smaller retail investors. CIMIC (CIM) comes to mind as an example. However in the years that PT AMNT have been MAH's largest shareholder, they have been nothing other than supportive, and because MAH is their only mining contractor for their biggest mine, it is in their best interests that MAH do OK. Their interests are aligned, so that's good for retail shareholders, in my opinion.

Three. The third thing that I think is worrying some people is a profit sharing arrangement announced a while back (2019 I think it was, or early 2020) whereby MAH's senior management will share in the benefits of hitting certain revenue and profit targets in future years through either cash bonuses or share options. This was covered well by Steve Johnson at Forager at the time it was announced, and his view was that while it looked overly generous to MAH's management, the other side of that coin was that IF they hit those targets, to achieve those bonuses, we, as MAH shareholders would be in a far better position than where we were when they announced them, because they were very ambitious targets, so to achieve them (and get their bonuses) they would have to grow revenue and profits considerably. I share that view. I actually don't mind management being rewarded for creating plenty of shareholder value. I just want some of that value to be reflected in the share price sometimes.

The upside of that arrangement is that it incentivises management to overachieve and it keeps them in place, i.e. if they leave the company, they do not get those bonuses.

So, in summary, happy to keep my old PTs in place, the first one got hit, as I've explained, even though the SP has retraced since, and the next one is my 12-month PT of 26 cps, and then my my 2-year PT of 30 cps (hence my 30c valuation). Those were set here in June (22-June-2021), so 26 cps by June 2022 and 30c by June 2023. Give or take a couple of months, because they report their full year results in August, so it might take until August for the reality of the quality and opportunity on offer here to sink in with the wider market. Of course, it could take longer, however I do have a reasonably good track record of businesses hitting my price targets within the timeframes I set for them. It doesn't always work out the way I thought it would (MFG springs to mind) but it does more often than not I find. Unless that's just me being selective with my memories...

Disclosure: I hold MAH shares - in 2 RL portfolios plus in my SM portfolio.

19-Sep-2022: Update: No change to my 30c/share PT for MAH. They remain my second favourite mining services company who do the actual mining for the mine owners. NRW Holdings (NWH) is #1 in my book, and they've recently performed well and enjoyed a positive re-rating from the market, and I took some profits last week (but still retain significant exposure to NWH).

Here's the 1-year chart for NWH (NRW Holdings):

Macmahon Holdings (MAH) on the other hand have been much less impressive, both in terms of their results (and metrics generally) and their share price. Here's their 5-year chart:

I think MAH are worth double the current 16c share price, mostly because of their strong client base, their $5 Billion order book (work in hand), their exposure to gold (where their clients are highly profitable despite the gold price hitting a new 2-year low last week), their massive $8.4 Billion tender pipeline - where a good percentage of that prospective new work is with Macmahon's existing clients, and their KMP (key management personnel) incentives which are based on total shareholder returns (TSRs) of which the share price is the major component.

However, while I'm not changing my PT, I'm giving them another 2 years to achieve it, so by mid-September 2024.

Another listed Australian contract miner (who I also held shares in), MACA (MLD) were also trading well below my PT for them, but they're currently being taken over by Thiess, at $1.075/share, less than I thought they were worth, but higher than where they were trading, so I've taken profits on them and moved on.

Macmahon (MAH) is due for a positive market re-rating, or they will likely also attract some M&A attention. NRW (NWH) did have a higher bid in for MACA (MLD), but they withdrew it recently after Thiess locked up over 15% of MACA and got the MACA management and board members to all sign contracts agreeing to sell their shares to Thiess. NRW are good that way - they are very disciplined with their M&A.

If MAH got taken over now, it would be unlikely to be for as much as 30c/share, but I feel they should be trading at those levels within 2 years if they execute on their opportunities in a half-decent way. Or to put it another way, even if they just live up to just half of their potential, I reckon they should be trading at 30c/share, so I'm happy to keep it at 30c, even if that is starting to look like a real stretch - compared to where they are now.

05-June-2023: Update: I haven't updated or reviewed this one since September, so it was marked as "stale". My old PT of 30c looks like a bridge too far from here - they closed today at 12.5 cps and that's just above their 12 month low share price of 12 cents/share. Let's aim for 20cps as a initial 24 month price target from here, so by June 2025, and I'll reassess when we get there. They could go to 30, but not without a takeover offer in the short term it seems. I still hold them both here and IRL. No real change to the investment thesis. They're still doing OK in terms of business performance. But the market isn't interested. And once the market loses interest in a "plodder" like this one who don't often make acquisitions or announce anything ground-breaking very often, it could take years for the market to get interested again. I like them because they're a solid business that has a good weighting to the gold and copper/gold sectors of the mining industry, and I like those metals, so I feel MAH have tailwinds there.

I also like them because they tend to chase long-term contracts, often life-of-mine (LOM) contracts which makes them more of a partner with the company that owns the mine than just another mining contractor. Some of their larger contracts are Alliance-style LOM contracts which provides us punters with unusually high visability of their revenue in future years, something that is reasonably rare among mining contractors and as rare as hens teeth with EPC contractors.

So - plenty of exposure to gold and copper/gold miners, but also diversifying into lithium now.

Source: Euroz-Hartleys-Rottnest-Conference-Presentation-March-2023.PDF

They're reasonably large now too, in terms of annual revenue and earnings:

Source: Same presentation (see previous slide).

They don't have high margins, but that's not uncommon in mining services these days. The days of high margins for contract miners are over I reckon. Now we're looking for ones with scale and that are consistently profitable. You can make a lot of money in a couple of different ways - by earning a lot on every dollar of revenue, or by earning a little but having a LOT of revenue, and with mining services, the ones that survive for 60 years (as Macmahon have done) are the ones have accepted lower margins, but remained profitable, and have increased their revenue substantially.

MAH do talk about increasing their margins, including in that presentation (link above), however I'll believe that when I see it. It's enough for now for them to keep winning lots of work and stay profitable. NRW Holdings (ASX: NWH) is another contract miner who have done the same thing, however NWH have also managed to diversify their business beyond just contract mining, but that's a story for another day. I hold shares in both NWH and MAH both here and IRL.

I thought MAH looked really cheap at 16 cents. They look a lot cheaper still - down here at 12.5 cents. I wonder how much cheaper they're going to get!?!

PowerPoint Presentation (irmau.com) [link for above Presentation]

18-April-2024: Update: I had a 20 cps PT on MAH when they were 12 to 13 cps, and now they're 24 cps and I reckon they're probably fully priced up here. As I said here recently: https://strawman.com/reports/SXE/Bear77 when talking about SXE, both MAH and SXE have had a nice little positive spike up in recent weeks, and on the back of that, MAH have announced that they are acquiring Decmil (DCG):

16-April-2024: MAH-Macmahon-to-Acquire-Decmil-to-Expand-Civil-Business.PDF

and: Investor-Presentation---Macmahon-to-Acquire-Decmil.PDF

and: DCG: Macmahon Offers to Acquire Decmil by Scheme of Arrangement.PDF

Now, I was a Macmahon (MAH) shareholder, but sold out in the second half of last year. I am NOT a fan of Decmil (DCG) and I am a hard "pass" on MAH now as a result of this acquisition. Not a fan of this one at all. They are not similar businesses at all - MAH were mining contractors who did open pit and underground mining for mine owners, and Decmil is an engineering and construction company who work in different sectors and have a chequered past. I generally like to see companies stick to what they do well and expand their offering (when they want to expand) in a slow and measured manner, but this ain't that.

Anyway, here 's what Trav, JD and Matty had to say about it on the day (Tuesday):

Macmahon buy Decmil [Money of Mine Podcast, Tuesday 16-April-2024]

Decmil ordinary shareholders will receive $0.30 cash per share from MAH, representing an 81.9% premium to Decmil’s 30-day VWAP. That's a massive control premium. And they are keeping the Decmil CEO on to run the business.

Tuesday was a red day across the market, with every sector down, however Decmil closed up +64.7% (17 cps up to 28 cps, so +11 cps). and MAH were down as much as -9.4% on the day, but closed "only" down -4% (down 1 cps) which they made back up the following day (down a cent Tuesday, up a cent Wednesday, down half a cent today, to 24 cps.

@Rick - we were discussing (over in SXE) exactly what MAH meant or were implying when they included the following slide in their Rottnest Island Conference Presentation on March 13th (last month):

And it appears that one of the things they were implying was that companies that THEY consider to be capital light (those on the left side of that slide) were trading at much healthier multiples than companies like Macmahon (on the right) tended to trade at, and they clearly consider Decmil to be one of those "capital light" companies, and they want "some of that action".

As JD discusses here, Civil Engineering and Construction (i.e. Decmil) isn't really any less tough than mining services is - they are both tough businesses that can have low margins. Decmil's FY24 EBITDA Guidance suggested a 3.8% EBITDA Margin, which is low, and is only really attractive when you have a huge amount of revenue, like a supermarket, or Bunnings or something like that. JD used the following chart:

Those are some companies that could be considered peers of Decmil, and all have better EBITDA margins than Decmil's 3.8%. I note that while MND's margins are consistent at around 6% and lower than their peers (other than Decmil), Mono's have a lot of revenue; they are a $1.3 billion company with revenue of $1.83 billion last FY, and $53.5m profit after tax, so a PAT margin of around 2.92% and an EBITDA margin of 5.96%. So low margin, but large, profitable and paying dividends.

Decmil (DCG) reported FY23 revenue of $489m and an EBITDA of just $9m (better than their -$44m EBITDA loss in FY22) and they reported a statutory net loss for the year of $1.8 million (2022: loss of $103 million), so DCG have been a loss making business in recent years. Obviously, due to no profits, there have been no dividends with DCG; their last dividend was paid in 2019, so almost 5 years ago. They have been a terrible business.

While MAH have had their ups and downs, they're a decent business that is currently on the up, and now they've gone and bought Decmil, the muppets...

So, yeah... nah... happy to be on the sidelines with MAH at this point, and I wouldn't touch Decmil with a barge pole. There isn't one long enough.