I’ve had a bit of a deep dive into Mader following its result this week. The headline numbers were strong and the growth will accelerate if their forecast is to be believed. Others have laid out what they do and where their growth will come from so I’ll let their words stand and really focus on the bits of the result I like and the bits I don’t (HINT: There’s no cash here. Here, there’s no cash. Cash! NO.)
The good stuff
- They provided guidance - and they weren’t shy about shooting for the moon either. Mostly it’s just good to see they feel they know their business well enough to provide a relatively tight guidance range.
- Expanding their service offerings and this is generating meaningful top and bottom line expansion.
- Their Short Term Incentive program seems to be well aligned with shareholder returns (NPBT, TRIFR and staff retention) and should assist longer term performance as well.
- Earnings per Share increasing each year
- Margins should improve as they move into higher margin markets like the U.S and Canada. Management stated they expect Canadian margins halfway between Australian and the U.S.
- They responded to retail investor queries at the investor briefing. I know this because they answered mine (partially – I’ve followed up and we’ll see what they come back with).
The not so good stuff
- Where’s the money? Their cash conversion seems consistently really low. Since 2017 (including prospectus figures) they have generated about $87m in NPAT. Adding back depreciation gives a figure around $117m. However, in the same time period they’ve disclosed operating cashflow of just $72m. Partly it’s explained by their growth and a corresponding increase in their receivables balance. Not sure that explains it all though…
- The lack of cash is why the dividend hasn’t changed since they listed and the payout ratio is low. I don’t really care about dividends per se but I do care that they’re forced into that position.
- Related to the points above debt is rising (so they’re really paying dividends out of debt). The whole message is just a bit disjointed. They describe themselves as a profitable, fast-growing and capital light business. Yet cash is down, borrowings are up, dividends are flat and they’re forecasting spending the equivalent of more than 80% of this year’s NPAT on capex in FY22.
- No Long Term Incentive program. I’m not so worried about that because I think the STI program measures factors in the long term interests of the company but it’s a bit odd.
- So I mentioned receivables; it’s the biggest number on their balance sheet by miles. It’s the main reason their cash is low. They also disclosed it’s critical in how they look at debt because they view their debt capacity as approximately 50% of their receivables balance (that only makes sense if they mean their net debt capacity, i.e. after subtracting cash, so I’ll give them the benefit of the doubt and assume that’s what they meant). All of this means that if you care at all about risk it’s a figure that matters. I would expect much better disclosure than they’ve provided. Where’s the ageing profile for starters? They don’t disclose a provision for doubtful debt or bad debt write off expense. Some of their peers go further than that even and include a table showing risk exposure i.e. this much is against AAA customers, that much against AA customers etc.
- ROE has steadily been declining since they listed. It’s still in the 30s though so still pretty strong - just a watch on that one.
- Where are the women? I’ll tell you one place they are – pictured all over their promo material and in the annual report. But the photographer has done well to find them. There’s no women on the board, no representation at a SMP level and only 7% representation among employees. It’s a sausage factory. Now I get it – given the industry it’s not going to be 50%. But they can do better than that. Start with at least token representation on the board and senior staff and work down.
- Only 1 independent director
- On the investor call they stated the depreciable life of their assets is significantly shorter than their useful life i.e. there will come a time when they’re getting benefit from their assets still and they’re fully depreciated so no expense in the P&L. Now that’s well and good but it’s contrary to the accounting standards and the opposite of what they state in their annual report. So I hope their auditors weren’t on the call.
It sounds like I really don’t like this business. I actually own it in RL and SM. The founder is still active in the business and owns a heap of it. It’s headline results speak for themselves. But there’s some questions here around governance and messaging that are flashing a deep amber to me. It was a bit of an impulse buy nearly 12 months ago now and I think it’s good to reflect on your holdings with a critical eye. I’ve emailed them with a few questions I have and I’ll be really interested to see what they come back with.
[Holding…]
