29-May-2020: Updated Guidance - FY2020
Further to the guidance issued by Lycopodium Limited (LYL) on 25 March 2020, the Company now provides a revised guidance of Net Profit After Tax (NPAT) in the order of $11.5 million for the financial year ending 30 June, 2020.
This updated guidance is in response to the ongoing impact of the COVID-19 pandemic on the global economy, which is materially impacting the award and commencement of new work.
Lycopodium’s Managing Director, Peter De Leo, said: “Whilst the progress of our projects in delivery has generally been unaffected, as was anticipated, COVID-19 has significantly impacted new opportunities coming to market, with projects delayed or suspended.”
The measures implemented to contain the pandemic are likely to continue to constrain global economic activity for an extended period.
The Company’s response to the crisis is being managed by a dedicated internal taskforce, with actions aligned with the advice provided by the various governments and authorities within the locations in which it operates globally.
“We are continuing to work with our people and clients to maintain business continuity and meet our current project obligations. As always, the health and wellbeing of our people, clients and partners, and the broader communities in which we operate, remains our priority during this unprecedented time.”
Disclosure: I hold LYL shares.
About Lycopodium (LYL): "Lycopodium is a leader in its field, working with clients to provide integrated engineering, construction and asset management solutions. We have the expertise to deliver complex, multidisciplinary projects, through to the provision of feasibility studies and advisory services. Operating across the Resources, Process Industries and Infrastructure sectors, we offer a diverse team of industry experts to deliver bespoke and innovative solutions across all commodity types. With the capability to deliver projects around the world, we have offices in Australia, South Africa, Canada and the Philippines."
For more, visit www.lycopodium.com
29 May-2020: I sent in three suggestions for "The Call" on Ausbiz yesterday afternoon, and they covered off all three today (while also making a few comments about the grouping of the 3). Those stocks were NWH (NRW Holdings), MAH (Macmahon Holdings) and MND (Monadelphous Group).
The two "experts" rated NWH as a buy, or best of breed (to paraphrase), but were not keen on MAH - and got a lot of things wrong about them - like suggesting they do a lot of work in South East Asia (yes they do) and South Africa (no they don't), and that their utilisation levels were low (wrong again). MAH are flat-out (busy), and that's why Andrew Wielandt from Dornbusch Partners (who is clearly the smarter and more researched of the two of them) commented that MAH have provided a 39% per annum return over the past 5 years. Adam referred to Macmahon as an engineering business too. That's debatable. MAH are a mining services company that predominantly does contract mining. Engineering is not one of their strong points. They have long life contracts (including many LOM - Life of Mine - contracts) and they are busier than they've ever been. It's a pity that these so called experts don't do a little fact checking every now and then before prattling off vague memories of what they think the company does, as well as getting their companies mixed up.
They had mixed feelings about MND (Monadelphous). Again, Adam Dawes from Shaw and Partners was providing misinformation about Mono's, saying that they had built and were operating mining accomodation villages in Australia and Mongolia and that MND are big in Mongolia. He suggested that the lower utilisation of their mining camps was creating a headwind for them. MND are NOT big in mining accomodation villages at all, in fact I don't think they own any accomodation villages. Perhaps he was thinking of Fleetwood (FWD) or Decmil (DCG), because those comments certainly DO apply to both of those two companies. Also, MND have a small office in Mongolia to support their contracts at RIO's massive Oyu Tolgoi copper/gold mine, but they're not "big" in Mongolia by any stretch.
MND have two large contracts at BHP's huge new South Flank iron ore mine development in WA's Pilbara region, and the progress of that work is a more likely determining factor as to whether they have a good year or bad year both in FY20 and FY21. MND have a very good working relationship with BHP and MND also have an excellent track record of rarely getting their costings or quoting wrong, so big cost blowouts are not something I would be particularly worried about with MND. They always ensure that they have clauses in their contracts that ensure that they do not lose money because of things that are outside of their own control. The client would likely wear the brunt of those additional costs. That's just sensible contracting, which is what MND are all about.
It was suggested by "The Call" "experts" that all of MND's contracts are Fixed Price or GMP (Guaranteed Maximum Price) contracts. I would consider that highly unlikely with contracts worth over $100m each for a company like BHP. However, knowing MND as I do, where they were willing to enter into FP or GMP contracts, they would build plenty of scope into those contracts to cover unexpected delays etc. They would also have insurance over those contracts, as they are a very conservatively run company, and they are big enough to be able to afford to do things properly. They are also very focussed on profitability (including ROE and ROCE) in each and every division of the company.
Adam also commented about NWH and MND having the better balance sheets, and that he was far more wary of MAH. However, Andrew had already mentioned that MAH had $155m of cash (disclosed in their latest update to the market). Inconsistent message there guys. The reality is that NWH have low debt and MND and MAH have plenty of net cash (no net debt), and all three have VERY solid balance sheets. MND are the most solid, but a lot of that is due to their very large size, and the size of their huge pile of net cash. MND had a cash balance of $163.3 million on December 31, and no debt.
MND do engineering and construction work mostly, whereas MAH do contract mining, so MAH have a lot more money tied up in mobile mining equipment (loaders, haul trucks, excavators, etc.), so MAH do carry more liabilities in relation to those assets (which are well covered by their LOM or long-life contracts). However, MAH are still in a net cash position, so are arguably in better shape than NWH, who still have some net debt from a recent acquisition. NWH's debt levels don't bother me at all however. Debt almost sent NWH broke after the last mining boom, and they definitely learned their lesson and have demonstrated many times over recent years that they will always pay their debt down quickly after using it to fund smart strategic acquisitions.
I currently consider those three companies (MND, NWH & MAH) to be the best three mining services companies in our market - in terms of engineering and construction services - and contract mining services - and all three are still undervalued by the market, having not recovered too much yet from their March lows. MAH has recovered the most, and arguably has less upside left from here. MND & NWH have plenty more upside, and also have quite a bit of work outside of both the mining and the energy sectors - they both are very active in infrastructure construction and maintenance across a number of sectors, NWH more so in transport infrastructure (road and rail), and MND in many other sectors (they're a much bigger company).
Anyway, I digress... LYL was the subject of this straw. LYL specialise in designing and building (and optimising) gold processing plants. MAH & NWH do a lot of work for gold mining companies also. LYL was originally the engineering arm of MND, which was spun out many moons ago, and LYL and MND have since formed a JV called Mondium which has been gaining some momentum and picking up some bigger contracts iover the past couple of years. Early this year, Mondium won a $400m construction contract from RIO, which was Mondium's biggest contract ever. Lycopodium's 40% interest in Mondium (MND own the other 60%) is worth keeping in mind when looking at LYL.
I hold LYL, MND, NWH & MAH.
In late March Lycopodium Limited (LYL) withdrew its FY20 guidance (Revenue $220m; NPAT $14.1m) given the potential for the developing COVID-19 pandemic to impact on its financial results.
LYL has for many years worked in numerous international jurisdictions outside of Australia, most notably across Africa, where it has nearly 30 years of experience successfully managing its operations in a variety of conditions, encompassing internal country politics, disease (e.g. Ebola) and terrorism.
Major projects tracking to plan: LYL’s major projects currently under construction in the field include the Yaouré Gold Project in Cote d’Ivoire for Perseus (PRU) and, via the Mondium JV, Western Turner Syncline (WTS) 2 for RIO.
PRU has recently provided updates advising that there have been no material impacts to its project development activities at Yaouré and that supply chains into Cote d’Ivoire remain open. Work at WTS2 has recently commenced with all indications that RIO (and other iron ore majors) are continuing in a largely business as usual manner with work at iron ore production and project development sites.
Revenue visibility solid for next ~12 months: At 1H20 LYL noted that recent awards of several projects and studies supported revenue growth into FY21, supported by work on the above projects. In the current highly uncertain environment, many companies would no doubt be reviewing their proposed capital expenditure / project development budgets. We expect, that in turn, this will somewhat cloud the demand outlook for LYL’s services during this period of uncertainty.
Positively, given LYL’s strong reputation and history in developing gold projects, the outlook for gold remains strong, with current prices of ~US$1,700oz providing support, though securing project financing will likely continue to present challenges for some.
Forecasts reduced; NPAT FY20 down 20%, FY21 down 14%: We reduce our forecasts, though note uncertainty (upside and downside) around these estimates is at a higher level than would usually be the case.
Buy; Price Target $5.36: LYL is very well-managed with a clear and consistent focus on the long-term sustainability of the business, underpinned by providing a quality service to clients.
With an EV of ~$75m, and average annual EBIT of ~$17m over the last 10 years (albeit with volatility dependent on macro conditions), we believe the current share price contains both downside protection (reported net cash of $111m) and upside risk. We maintain our Buy recommendation. Our price target reduces to $5.36 / share from $6.57 / share previously.
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Disclosure: I hold LYL shares.
26-Feb-2020: A solid set of FY2020 H1 (first half) results were released this morning by Lycopodium (LYL):
Lycopodium Limited (“Lycopodium” or the “Company”) has delivered a positive result for the first half of FY2020, with strong revenue reflecting the ongoing delivery of a number of significant projects. This includes the engineering, procurement and construction (EPC) contract for Perseus’ Yaouré Project in Côte d’Ivoire and the engineering, procurement and construction management (EPCM) services contract for West African Resources’ Sanbrado Project in Burkina Faso.
For the six-months ended 31 December 2019 (“1H FY2020”), the Company generated revenue of $110.3 million, representing an increase of 51% on the 1H FY2019 result, and net profit after tax of $8.9 million, slightly higher than the same period in FY2019.
It is expected the second half of the year will be softer, due to the timing of new projects commencing and anticipated delays impacting revenue. On this basis, the Company provides guidance for the full year of approximately $220 million in revenue and NPAT of $14.1 million. The Coronavirus is noted as a developing issue beyond the Company’s control, with any potential impact not taken into consideration in the full year guidance.
The company Directors have approved a fully franked interim dividend of 15 cents per share, payable on 10 April 2020.
Lycopodium’s Managing Director, Peter De Leo, said: “We are continuing to deliver solid financial performance and return for our shareholders, working on a number of sizeable projects around the world. The delivery of Perseus’ Yaouré Project, our largest EPC contract to date, and the award of Rio Tinto’s Western Turner Syncline Phase 2 project, Mondium’s first major project award, both present the opportunity to showcase broad, multidisciplinary capability.”
“Given the scale of projects in delivery over the past few months, across disparate and often challenging locations, the Company’s exemplary safety performance is a credit to our people and reflective of their absolute commitment to achieving a safe working environment.”
The recent award of several projects and studies will support revenue growth moving into FY2021, as new projects ramp up later this year. This includes delivery of the Optimised Feasibility Study (OFS) and commencement of front-end engineering design (FEED) for Sandfire Resources’ new Motheo Copper Project Processing Plant in Botswana, and the award of the EP contract for IAMGOLD Corporation’s Boto Gold Project in Senegal.
Mondium Pty Ltd, Lycopodium’s incorporated joint venture with Monadelphous which provides engineering, procurement and construction (EPC) services to the minerals processing sector, has been awarded a major contract by Rio Tinto, valued at approximately $400 million, for the design and construction of the Western Turner Syncline Phase 2 (WTS2) mineral processing facilities and associated infrastructure to be built in the Pilbara region of Western Australia. Work on this significant project has commenced, and is expected to be completed during 2021.
The Company’s Infrastructure business is delivering a number of material briefs, including the provision of condition surveys and design services for the Australian Rail Track Corporation (ARTC) and the Country Regional Network (CRN), and rail inspection services for various clients including Pacific National, BHPB and Southern Ports Authority.
The Company’s Industrial Processes business continues to leverage its expertise in the delivery of projects and engineering services in the areas of specialty chemicals, pharmaceutical and heat/mass transfer. This includes the successful delivery of the Geo40 Silica Extraction Plant in New Zealand which was completed in December.
Tendering activity remains strong, with projects and studies being targeted across the Company’s operating sectors, including leveraging established relationships to secure ongoing works with key clients.
“We have a strong pipeline of key identified prospects that enable us to leverage our diversified offering across a broad range of projects and geographies,” said Mr De Leo.
Disclosure: I hold LYL shares.
25-Mar-2020: 5:45: FY2020 Guidance - COVID-19 Impact
Withdraws previous guidance, will pay the interim dividend as planned, has very strong balance sheet with no net debt. Their SP is up, not down, after this announcement, suggesting the downside was already priced in.
Lycopodium Limited (LYL) has delivered 1H20 NPAT of $9.0m, representing growth of 5% on 1H19 ($8.6m). An interim dividend of 15cps has been declared, in line with 1H19.
This was another solid result from LYL with management reporting that project execution continued to be strong.
Delays again impact guidance…
Unfortunately, a common theme for LYL, and indeed the broader sector, over the last 12-18 months has been continued delays to project commencements.
LYL has provided updated guidance for revenue of $220m and NPAT of $14.1m. Previous guidance was for revenue of $220m and NPAT “generally in line with FY19” ($16.5m).
LYL notes that guidance has been impacted by delays to new project commencement impacting on revenue. With project performance solid as expected, this implies that initial internal revenue expectations were likely higher than stated guidance. Our FY20 NPAT estimate reduces to be in line with updated guidance.
…though outlook remains strong
LYL advises that recent awards of several projects and studies will support revenue growth into FY21 as new projects ramp up later this year.
Additionally, LYL notes that tendering activity remains strong, as does the pipeline of identified prospects.
The outlook for gold remains strong, with current prices of US$1,640oz providing support for developments, though securing project financing continues to be a challenge for some.
Mondium (LYL 40%) has commenced work on its $400m contract with RIO at Western Turner Syncline, which is expected to complete in 1H22. Meanwhile LYL continues work on its key EPC project at Yaouré for Perseus (PRU). PRU recently announced that the project remains on track to achieve its stretch target of first gold in December 2020.
Cash position very strong
LYL continues to maintain its focus on having a very strong balance sheet. At 1H20 net cash stood at $111m, buoyed by receipt of material payments in advance during the period. We estimate that on a pro-forma basis LYL has net cash of ~$77m (see page 4).
Buy; Price Target $6.57
LYL is a very well-managed business. While project delays continue to impact, the outlook remains positive with LYL well-positioned to benefit.
We maintain our Buy recommendation. Our price target reduces to $6.57 / share from $6.76 / share previously.
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I do hold LYL shares. They closed at $5.50 today (28-Feb-2020).