27 April 2023: MA Moelis Australia: Mader Group Ltd (Buy): "Another record quarter, strong growth continues, reaffirmed guidance"
That's the first page - click here to access the full report.
Disclosure: I hold MAD here in my Strawman.com virtual portfolio.
1:48pm, 01-Feb-2022: There have been some isolated cases of Covid-19 in WA's mining industry, and BHP is one of the companies that has been affected.
COVID cases isolate dozens of WA mine staff - Australian Mining
At this stage, the management of all of the affected mines are saying there have been no material impacts to production. It does however feed into the skilled worker shortage that WA is experiencing. There are now even ads on Adelaide buses spruiking WA as a place with PLENTY of work, so worth considering a move over there. Seems out of step with their refusal to open their border and allow people in though.
I'm thinking that these conditions are very positive for a company like Mader Group (ASX: MAD) as long as they can keep their own workers Covid-free. Mader provide fitters and other skilled workers - especially heavy duty mobile and fixed plant mechanics - to various industries, but the mining industry is their bread and butter, with earth-moving/construction also providing MAD with plenty of work. My brother is one of those (HD plant mechanic) and he's working at S32's Worsley Alumina refinery (which was majority owned by BHP before the South32 spin-out/demerger). He doesn't work for Mader - he works for another labour hire company that also provides workers to the mining and minerals processing industries. Those labour hire companies are doing very well at the moment, especially in WA, and remember that WA only has a small fraction of people with Covid-19 compared to the eastern states and SA. If the Covid problem gets worse there, I reckon the labour hire companies are only going to get busier. They already have rising metals/materials prices as a tailwind, which is resulting in further activity in the sectors they operate in. I think Mader provides the purest exposure to that and I do hold Mader shares, and S32 shares - but not BHP at this point.
28th July 2021: Euroz Hartleys: Mader Group (MAD): 4th Quarter operational update
Analyst: Gavin Allen - Senior Analyst, +61 8 9488 1413
Price Target: $1.21/sh (under review), Recommendation: Buy
4th Quarter operational update
Key Points:
MAD has provided a positive 4th quarter operational update this morning with the following highlights:
- Q4 revenue for the group of $86.4m, up 21% on pcp and up 14% on Q3 revenue; a record for the company.
- Revenues were up across all geographies, with Australia experiencing high levels of demand as focus areas in infrastructure and ancillary maintenance gained traction and operating conditions on the East Coast improved.
- Top line growth resumed in the US, up 21% on what had been a consolidatory 3Q and this is encouraging in light of preparations for operational delivery into Canada now being complete.
- Rest of World revenue continues to grow quarter over quarter off a low base, however remains well off pre-covid activity levels and this offers significant future leverage.
- EBITDA margin improvement was a highlight at 13.2% for the quarter versus 12.1% pcp and 11.1% during 3Q 2021.
- Net debt at $23.3m is in line with our expectations.
- The outlook statement looks for further top line growth in 2022 and stable margins, and this is consistent with our forecasts and expectations.
Investment Thesis
MAD has and continues to develop track record in providing a disruptive service into a large heavy equipment maintenance and shut down market. The offering is relatively capital light and growth is available organically off what is still, in many regions, a low base.
In the meantime the update indicates strong operational performance during 4Q and this translates to a strong 2021 overall. The well understood skilled labour shortage in Australia is a challenge, yes; however it is challenge that drives the demand equation for MAD. Addressing this challenge is part of the DNA of the business, and we wonder if this is well understood. We look to our PT with upward bias as we transition from 2021 to 2022 prospects. Buy maintained.
Mader Group (MAD)
- Share Price: $0.94/sh
- Price Target: (under review) $1.21/sh
- Valuation: $1.65/sh
- Shares on issue: 200 m(dil)
- Market Capitalisation: A$188m
- Enterprise Value: A$211.3m
- Net debt (excl leases): A$23.3m
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That client note from EH caught my eye today - must be the two lots of 7 dot points. It's just over a week old - distributed by Euroz Hartleys to their clients on 29-July-2021 and made available to the ASX Equity Research Scheme, so it was included in the ASX's Friday email yesterday, along with another report by Euroz Hartleys on Silex Systems.
First off, if you think you've heard of the MAD ticker code before, you probably have - it used to be the ticker code for Maverick Drilling and Exploration Ltd, which changed their name to Freedom Oil and Gas and their ticker code to FDM in November 2016, then their Directors put the company into voluntary administration in March 2020, blaming "the current oil price environment combined with COVID-19’s impact on the global equity markets" for their demise.
So the MAD ticker code was freed up back in November 2016, and Mader Group grabbed it when they IPO'd in late September 2019. However, to be very clear, Mader Group have nothing to do with Maverick Drilling and Exploration or Freedom Oil and Gas. They are not associated with them in any way, except that they've both used the same "MAD" ticker code at different times in their respective histories.
Mader Group was founded by Luke Mader in 2005. Commencing his career as a tradesperson at a Cat dealer network, Luke later transitioned into marketing an OEM (original equipment manufacturer) in the owner miner division. While there he identified an underserviced ‘niche’ in the market, so established Mader. Working as a single man band out of his Ute in the Kimberley, Luke built the business from the ground up, strategising, executing & overseeing the business through all stages of growth in changing market conditions, from conception to what it is today. Luke currently leads Mader Group's strategic development to foster global expansion.
I've looked at Mader Group before, because my brother (who works in that industry) has told me that they are well regarded and in demand, and always seem to have plenty of work, because they are good at what they do, which is maintain and repair heavy equipment such as large earthmoving equipment: dozers, graders, haul trucks, excavators, scrapers, rollers, loaders, etc. Mader Group (MAD) sepcialise in Caterpillar gear, usually referred to simply as Cat gear. However they will work on all brands, and they also do maintenance and repairs of fixed plant, in addition to mobile plant.
In mining, an area that uses a lot of heavy earthmoving equipment, mobile plant downtime needs to be minimised and there is usually a strong focus on (a) keeping the equipment running when it's supposed to run (so regular scheduled maintenance to prevent breakdowns) and (b) repairing equipment as quickly as possible when it does break down, so getting it back to work ASAP.
If we take Cat equipment as an example, as they are generally considered the gold standard in heavy earthmoving equipment, each geographical area has its own licensed Cat distributor, who sell the gear and also repair it as required, provide spare parts, warranty work, etc., and can do scheduled servicing and maintenance of the equipment on-site if companies want to pay for that, but going genuine for aftermarket maintenance and repairs (outside of the warranty period) comes at a significant cost, which not everybody is prepared to pay. There is also the issue of availability of qualified heavy plant mechanics - there can be a significant wait time if you go with the authorised state Cat distributor for your maintenance and/or repairs.
To give a more specific example, I'll use Western Australia, because it is the Australian state with the highest proportion of minesites, and the most Cat equipment, and the largest Cat Dealer network, which is WesTrac, owned by Kerry and Ryan Stokes' Seven Group Holdings (ASX: SVW). WesTrac is the authorised Cat dealership in Australia for WA, NSW and the ACT. They also had a very large presence in China, but Kerry sold the Chinese Caterpillar franchise (WesTrac China), for $540 million to Lei Shing Hong Machinery Limited in 2017. [source]
Caterpillar began operating in Western Australia in 1925 with a dealership being opened at the South Guildford premises that is still WesTrac's HQ today in 1950. Known as Wigmores back then, the dealership was renamed as Morgans and then WesTrac after it was bought in 1988 by Australian Capital Equity, one of Kerry Stokes' many companies. It was merged with Seven Network Ltd (Channel 7) in 2010 to form Seven Group Holdings (SVW) which today owns 100% of WesTrac, 40.88% of Seven West Media (SVM) plus various energy assets (including 28.5% of Beach Energy - BPT), and about 70% of Boral (BLD) at last count - and they are still buying Boral shares. Seven Group Holdings also owns Coates Hire, Australia's largest equipment hire business and AllightSykes, a supplier of lighting towers, generators and pumps.
WesTrac have a large group of maintenance technicians (heavy plant mechanics) who work on Cat gear, including regular maintenance and repairs, however Mader Group can do the same work just as well, usually at a lower cost, and often quicker. It's not that they necessarily work faster, it's more that they can often get a mechanic out to site quicker than WesTrac can. The parts are probably going to cost much the same from both, as Mader buy parts through WesTrac at wholesale prices, or at the very least with a very good discount off the retail price because they buy so much, and they are happy to sell those parts to their clients for the same price that the clients would be paying WesTrac if they ordered the parts directly from WesTrac themselves, or if they wanted WesTrac to install the parts.
The main price difference is in the labour charges, and the other main point of difference is the availability of techs (mechanics). Mader employ more mechanics because when they're not working on Cat gear, Mader use them to work on other equipment, both mobile and fixed plant. Mader also have more regional bases than WesTrac do throughout WA, so when it's not a FIFO job, Mader often have people that are closer to where they are needed than WesTrac do, and so they can get them to site faster. On FIFO jobs, Mader can still usually get somebody out quicker than WesTrac because Mader have more suitably skilled employees working for them and the WesTrac techs are often very busy and there can be a significant backlog of work to get through both out at various sites and back at their South Guildford Headquarters in Perth.
Some minesites have Mader personnel onsite all of the time performing fixed plant maintenance and repairs and those same people can be used to fix mobile plant or do mobile plant maintenance as and when required.
So that's just a small insight into the business model or at least the value proposition that Mader offers to miners and other users of Cat and other heavy mobile plant/equipment. If you browse through their website you'll see they do heaps of other stuff also.
Mader Group have over 1,400 employees and they operate across Australia, Africa, Asia, South America and North America [source]. Luke Mader, the company's founder, owns 56.6% of the company, and another 19.9% (40m shares) is held by the Skye Alba Fund, which is controlled by Craig Burton, one of Mader Group's non-executive Directors (NEDs). Craig is a venture capital investor in emerging companies, projects and businesses, and is an active investor in resources, resource services and technology sectors, with a track record of providing financing backing and strategic advice to successful business teams and start-up entrepreneurs. As well as being a NED of MAD, Craig Burton is also the Chairman of Grand Gulf Energy Limited (GGE) and Cradle Resources Limited (CXX).
When you subtract the 76.5% of the company owned by Luke and Craig, it leaves a free float of just 23.5% of the company, so market liquidity can be an issue. However, for a small cap - market cap is a shade under $200m currently - it has adequate liquidity for the average retail investor, in my opinion, as long as you don't want to hold millions of dollars worth of the company. A $20K to $50K position would not be hard to build in a short time without moving the share price very much, if at all. Likewise, getting out looks to be reasonably easy also, although that can change a lot if they were to suddenly announce bad news and everyone wanted to sell at once - a problem that affects most small companies, particularly those with relatively small free floats.
Although Luke established Mader Group back in 2005, 16 years ago, it was only IPO'd in late September 2019, so has been a listed company for less than 2 years. That was the main reason why I have not, up until now, invested in the company - short history. With new IPOs I usually want to see them meet and preferably exceed their Prospectus forecasts, and then continue to grow.
There are a couple of things I do like about the Mader Group IPO. The first is that the founder (Luke Mader) has not used the IPO to substantially sell down his equity - he still owns over half of the company, however he certainly did sell down a portion of his shares into the IPO and the rest of his shares (56.6% of the company) were escrowed until 31st October 2020. Since that date he has sold no shares, even though he is free to do so.
The second thing I like is that they included an Employee Offer in the IPO which enabled staff to buy shares in the IPO at 90 cps, a 10% discount to the $1/share price that retail and institutional investors paid. They said in the Prospectus that the purpose of the Employee Offer was (1) to increase the level of employee ownership; and (2) to foster continued loyalty and ongoing performance by current employees.
I call it alignment of interests, and I am a big fan of employees being shareholders of the companies they work for, particularly when those companies are companies that are worth owning shares in - as this one appears to be - in terms of being relatively undervalued by the market and having good growth prospects ahead of them.
3.3 million (or 6.6%) of the 50 million shares that were offered for sale in the IPO were set aside for the Employee Offer, comprising approximately 0.4 million Shares offered under the Leadership Team Offer and 2.9 million Shares offered under the Staff Offer. Shares not subscribed for under the Employee Offer were made available under the Priority Offer or the Retail Offer at the $1 Offer Price. In their "Pre-Quotation Confirmations" announcement on 25-Sep-2019, MAD said that 495,621 shares (0.25% of the company) had been issued to their Leadership Team Offer applicants and 1,139,115 shares (0.57% of the company) had been issued to Staff Offer applicants. The Leadership Team offer was oversubscribed (400K offered, 495.6K issued) and the takeup of the Staff Offer was just over 39% (2.9m offered, 1.139m issued), which isn't bad considering they had to pay up for the shares (90 cents per share) - they were not issued any for free.
I like their results to date, I think they've got strong industry tailwinds currently, particularly in places like WA where there is a shortage of skilled workers of the type that Mader employ, particularly in Northern WA, I like that the company's founder still owns most of the company and is still an Executive Director of the company, I like that a significant percentage of their staff and leadership team are MAD shareholders as well, and they are profitable and do not look particularly expensive.
Commsec list their ROE as 36% and their ROC as 30%. Their PE numbers are all over the place depending on which sites you look at, however, based on their latest quarterly report, they look cheap!
Their Quarterly Operational Update for Q4 of FY21 released last week (on 28-July-2021) showed that they generated Total Revenue in the quarter of A$86.4m from which they had EBITDA of A$11.5m, an EBITDA margin of 13.2%. At that run-rate, they should generate at least $46m in EBITDA for FY22, and their current market cap (@ $0.98/share) is $196m. They do NOT look expensive. Even if they only made $30m in NPAT in FY22 - and I think that's very conservative - that puts them on a forward PE of under 7.
On Debt: Mader Group ended the quarter with net debt of $23.3m, up $4.9m from PCP. The moderate increase on the PCP reflects the significant revenue growth between Q3 and Q4 FY21 requiring an increase in the investment in working capital for the business. I would prefer zero debt with a company of this type, however they are expanding globally and the debt is clearly manageable. Everything else is heading in the right direction. However I will be keeping an eye on their net debt position.
Here's their outlook statement included in that quarterly report last week:
FY22 OUTLOOK
Our disruptive business model continues to roll out into a large addressable market that has an appetite for significant additional capacity. All of our core business divisions continue to grow and our strategy of building new divisions that address new geographic locations or that provide additional trades and services is driving further growth.
We are seeing structural advances in the Australian market as large owner-miners continue to develop multibillion-dollar resource projects, ultimately increasing the size of the maintainable mining fleet.
Our focus and extensive experience in securing and developing new talent continues to drive solid growth in our global workforce. This is further supported by our internal Trade Upgrade Program and bespoke national recruitment campaigns.
Ongoing revenue growth and stable margins are expected to continue throughout FY22.
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I think this company presents as a good opportunity at the current price - i.e. just below their $1 IPO price from September 2019. If anybody has some feedback, positive or negative, or some holes they'd like to poke/shoot in my investment thesis, please do - either by posting a straw or valuation, or by posting in the MAD forum - which can be found here: https://strawman.com/forums/topic/5338
Further Reading:
https://www.facebook.com/MaderGroup/
https://twitter.com/Mader_Group
https://www.linkedin.com/company/mader-group/about/
https://www.glassdoor.com.au/Overview/Working-at-Mader-Group-EI_IE2287135.11,22.htm
Disclosure: As of today (Saturday 7th August 2021), I do not own any shares in Mader Group, however that could change at any time, although likely not before Monday morning.
