Consensus community valuation
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.
Thursday 29th June 2023: FY23-Guidance-Update.PDF
MAH closed today up +19.23% @ $0.155 on the back of this update.
They are coming off a low base. They closed at 12 cents/share earlier this month (6th June) and prior to today's move, they hadn't been above 13.5c/share since mid-May.
I rang Mick Finnegan up earlier this week and told him he better get something positive out there quickish-like, coz MAH was one of my three stock picks in the Strawman.com "FY23 Stock (Company) Picks" Forum and FY23 finishes on Friday (tomorrow), so it would be handy if they don't finish the FY on their lows. And he waited until Thursday!!
OK, I did not make that call. Mick doesn't know me or care what I think. But his remuneration includes incentives, and that also goes for other senior management personnel at Macmahon, and those incentives have to be earned, and one of the main hurdles that has to be conquered to qualify for the biggest incentives is achieving decent TSRs - Total Shareholder Returns - which includes share price gains/losses added to dividends and any other payments made to shareholders. Mick and the other KMP at MAH haven't been earning much in the way of incentive payments (either cash or shares) over the past couple of years, mainly because their TSR's have been dismal. It would be nice if today's guidance and business update could be the trigger that starts a share price turnaround/uptrend... Wishful thinking?! A +19.23% SP rise in one day is a good start, but they do need to keep rising from here.
It's in their interests to achieve much better TSRs for us shareholders, both because (a) they are also shareholders, and (b) because the incentive structure of their remuneration arrangements depends on it (for the incentives to be paid).
Steve Johnson, of Forager Funds, when talking about Macmahon's overly generous incentives a few years ago, said, and I'm paraphrasing here, so don't quote me on this, but something along the lines of... They are very generous, however they will not be easy to earn, and if they do earn them, we, as shareholders, will have done very well indeed out of holding Macmahon shares from here.
Well, fast forward a few years, and SJ was correct, in that they were NOT easy to earn, and they did NOT earn them (and they were NOT paid those incentive payments), and as a result we, as shareholders, have NOT done particularly well out of holding Macmahon shares over the past few years.
Plenty of potential, but so little delivered to shareholders recently...
Maybe one for FY24?!
Disclosure: I continue to hold MAH shares, both here and IRL (in real life). They are one of my two favourite mining services companies that do the actual contract mining for mine owners. The other one is NRW Holdings (NWH). NWH have performed better, and appear to have better management, and they are also more diversified than MAH are (in terms of revenue generation from different business units), however I still have high hopes for MAH.
Further Reading: Canaccord-Mining-Services-Series-Presentation-June-2023.PDF [15 June 2023]
Macmahon Holdings Limited | Mining & Construction Australia [company website]
23-Nov-2022: Cannacord-Genuity-Investor-Roundtable.PDF
Also: NOTICE-OF-AWARD-TALISON-GREENBUSHES-LITHIUM-PROJECT.PDF
The following are three slides from Macmahon's presentation at the Cannaccord Genuity Investor Roundtable today:
Firstly, a one slide overview of the business:
Next, they have called out Labour Challenges (People Resourcing) as something that they are currently having to deal with:
Lastly, here's their "Outlook" slide:
Disclosure: I hold MAH shares. I'd like to see them pay down their debt a little quicker, and win more work, however the announcement today of the Talison Lithium Greenbushes project load and haul services contract win is a welcome step in that direction.
21-Oct-2022: Macmahon (MAH) held their 2022 AGM today, and here's a link to their AGM Presentation.
The Presso is 30 pages in length. Here are the main 5 slides (IMO) that sum up the company's FY22 performance and their current future outlook and priorities.
They're in reasonable shape actually. I do hold MAH shares both here and in real life. They are also one of my three FY23 Stock (Company) Picks here, and remain so, even though their share price hasn't done anything positive in the first 4 months of FY23.
I think they're the best gold mining contractors listed on the ASX and one of the best mining services companies overall also. I do not believe that their share price is reflecting their overall business performance, which is decent. However, while mining services remains an unloved sector, MAH will most likely continue to remain undervalued by the market.
They will have their time in the sun again one day, and I can wait. They are only growing the business in the meantime.
Macmahon Holdings Limited | Mining & Construction Australia
24-Aug-2022: I did post a long straw about Macmahon's FY22 full year results last night, and I posted a "Bull Case" straw and a "Management" straw about them on Sunday. This one is just about their Strategy, Priorities and Outlook, and is all taken from yesterday's Macmahon FY22 Investor Presentation.
So, to be clear, the "Results" straw that I posted last night was about what they have achieved, whereas this one is about what they say they're going to do in the future. I like to keep those two things separate sometimes so that I can easily go back and look at what a company says they're going to do, and see if they've actually done it.
The other way of looking at it is that this straw is about the "talk" and last night's was about the "walk". The best companies underpromise and then overdeliver, but they always walk the talk, they do what they say they're going to.
Just in terms of Macmahon meeting their previous guidance, I'll repeat one slide from last night:
Disclosure: I hold MAH shares, and as I said in last night's straw, if they keep performing as they have, they will either get positively rerated by the market or else they'll get taken over by another company, just as their competitor MACA (MLD) is at the moment with a $1.025/share offer from Thiess and a $1.085 offer from NRW Holdings (NWH, who I also hold). I sold all of my MACA (MLD) shares into this week's higher prices on Monday morning. I used the proceeds of that sale to buy more (another $21.5K of) Lycopodium (LYL) shares on Monday and Tuesday at between $6.04 and $6.14 (average price of $6.09).
LYL will report today (Wednesday 24-Aug-2022) and it will be another good one! LYL can have liquidity issues so the SP tends to have volatile moves, when it moves at all, but they pay very nice dividends and they just keep on performing and growing the value of the business over time. Lycopodium was once the engineering arm of Monadelphous (MND) who reported yesterday and their SP rose +5.86% to close at $12.11. Mono's are another company with strong and capable management who have skin in the game and tend to underpromise and overdeliver. I also hold MND shares. As well as holding them IRL (in real life), MAH, NWH, LYL and MND are all also in my Strawman.com virtual portfolio. They have all been good companies to hold as core positions and top up when they're trading at very cheap levels and trim the positions when they're fully priced. Another one is GNG, who had a cracker of a report on Monday (22nd Aug 2022). Based on today's closing share price ($2.32), GNG's dividend yield (including the 10c/share FF dividend they've just declared added to their 9c/share FF interim dividend paid in March) is 8.19% and when you include the franking credits the grossed up yield is closer to 11.5%. GNG is the largest position in one of my real life portfolios - the one that also holds LYL and is partially designed to provide a good income stream.
With all of those companies, I bought the bulk of my shares at significantly lower levels than where they are today, with the exception of Macmahon (MAH) who just look ridiculously cheap to me at current levels. I will likely keep buying more MAH shares if they stay under 18 cps, because at some point something will give.
23-August-2022: Good Results again from Macmahon (MAH). They finished the day up half a cent (+2.94%) at 17.5cps:
They have addressed the elephant in the room - being the high inflationary environment with rising labour and other costs:
As stated there, their contracts are structured so that increases in input costs - including labour - are passed through to their clients, with 43% of revenue derived from Alliance-style contracts with budget adjustment mechanisms, and the remaining 57% of revenue being from "Schedule of Rates" contracts that contain rise and fall provisions which are adjusted either monthly, quarterly, or twice a year (bi-annually).
That said, the most obvious negative in their results (amongst a plethora of positives) was a lower EBIT (Profit) margin (see bottom right, below), which was 5.9% in FY22 vs. 7.1% in FY21. They say this was impacted by new project starts, COVID and inflation cost recoveries, so either input and wage inflation has hurt their bottom line or their claims to recover those increases (through their various existing contract mechanisms) mean that they have paid the costs in FY22 and some of those costs won't be recovered until FY23, which still means their bottom line was affected in FY22.
They have chosen to highlight the fact that they have either met or exceeded their own guidance in every one of the past 5 years. They can't control market sentiment, and therefore their own share price, but they can keep putting runs on the board, increasing revenue, increasing profits, and delivering results that are comfortably within (or above) their own guidance.
Here's how they performed in FY22 compared to FY21:
The standout negative there is the lower reported NPAT and EPS, which was affected by a GBF earn-out payment (to the vendors who sold GBF Underground to Macmahon) and other one-off adjustments. If you back those out, the FY22 underlying NPAT was 5% higher than FY21.
This was how their revenue was derived in FY22:
So the Tropicana gold mine and it's underground extension, Boston Shaker (both owned 70% by AngloGold Ashanti and 30% by Regis Resources), have now together become Macmahon's largest revenue source (17% of FY22 revenue), just pipping the Batu Hijau copper/gold mine owned by PT AMNT (Macmahon's largest shareholder) which represented 16% of FY22 revenue for Macmahon..
The following addresses MAH's Cash Flow and CapEx (capital expenditure) in FY22 as well as FY23 CapEx forecasts:
This is not a capital light business, and new contracts often mean taking on additional debt initially to buy or lease the equipment required to perform the new work. While it's important to realise that this company DOES have net debt, and quite a bit of it ($215m of net debt as at 30-June-2022, as shown in the balance sheet summary below), that debt is underpinned by medium and long-term contracts. The debt has been used to purchase equipment that is used to generate revenue, and the ability of that equipment to continue to generate revenue is underpinned by the contracts that Macmahon have with their clients. If you subtract the $228m of equipment leases (listed below, right) that they had at 30-June-2022, they would actually be in a net cash position (with no net debt), as they had $198m of cash in the bank.
Their results announcement today said, "Macmahon retains a solid balance sheet with gearing reducing to 27.8% (including AASB 16 Leases) as at 30 June 2022 from 31.1% at the end of 1H22. Net Debt to EBITDA also improved in the second half to 0.74x. Cash on hand was $198 million with net debt of $215.5 million at 30 June 2022. Cash and unutilised working capital facilities at financial year end totalled $256 million (30 June 2021: $287.7 million). In July, the Company refinanced its existing $170 million bank facility into an enhanced $200 million facility with an improvement in interest rate and key terms, providing additional funding capacity. Liquidity post refinancing increased to $297 million providing substantial capacity to support the Company’s execution of its strategic objectives."
Again, they have highlighted their sustainability focus and their people focus:
As I said in my "Management" straw for MAH, this is important to me, and I did read something earlier today about that weasel Alan Joyce (the boss at QANTAS) which shows the opposite end of the spectrum when it comes to valuing people as your best assets:
Joyce’s apology scarcely credible from same old Qantas (msn.com)
That was penned by Bernard Keane and originally published by "Crikey" - https://www.crikey.com.au/ who have got some big brass ones - they are currently in an open war with Lachlan Murdoch - as their site clearly shows.
Anyway, back to Macmahon who clearly value their workers a lot more highly than Alan Joyce values QANTAS employees...
Macmahon do have analyst coverage other than from Macquarie. Macquarie is the only broker I have access to (via FNArena), but MAH are also actively covered by Argonaut, Canaccord Genuity, Euroz Hartleys, Jarden and Moelis, as shown below.
In terms of institutional investors and fund managers, Macmahon have Paradice Investment Management as substantial holders with 7%.
23% of MAH is owned by Australian Funds (which includes Paradice's 7%) and 10% is owned by Overseas Funds. If you add in the 44.3% owned by their Indonesian client and largest shareholder, PT AMNT (who I discussed in my "Bull Case" straw on Sunday), that only leaves a free float of 22.7% for Retail (& "other") investors. "Other" would include management, and I discussed management shareholdings in my "Management" straw on Sunday. Management are not large shareholders because their remuneration structure has largely been linked to performance hurdles that have not been met, so shares that might have been awarded to senior management have not been. Their main performance hurdle has been TSR - total shareholder return, a hurdle I am very comfortable with.
The following is a handy reference guide of where Macmahon's clients are located:
Most of the sites they work on (i.e. 21 of them) are located in WA, with 6 in Queensland, 4 in Indonesia, 1 in Malaysia, and 1 also in each of the NT, SA and Victoria, with none in NSW or Tassie. Remember that if these images are too small and you can't read them easily, click on them and they should get bigger.
Or you can click here to access the full FY22 Results Presentation (that all of the above slides have been taken from) that was released by Macmahon today.
There is also their Macmahon FY22 Results Release which contains the following overview of FY22:
The Board has declared a final dividend of 0.35 cents per share, bringing the total FY22 dividend payment to 0.65 cents per share, unchanged on FY21. The total dividend represents a payout ratio of 22%, consistent with the Company’s current dividend policy payout range of 10 - 25% of underlying EPS. The final dividend is unfranked, has a record date of 23 September 2022, and will be paid to shareholders on 7 October 2022.
FY22 Guidance and Outlook: [taken from that announcement today]
The global demand outlook for key minerals remains positive, notwithstanding recent central bank measures to increase interest rates in response to rising inflation. Interest rates whilst increasing, remain at historically low levels and with continuing activity across the mining and resources sector, Macmahon’s tender pipeline remains robust at $8.4 billion. A positive medium-term outlook is supported by a strong order book of $5.0 billion(*5) at 30 June 2022.
The tight labour market across Australia and global inflationary pressures are issues that are being actively managed by the business. Macmahon’s existing and recently commenced projects are expected to contribute to earnings growth in FY23.
Guidance for FY23 is for revenue between $1.6 – $1.7 billion(*10) and underlying EBIT(A) of $105 – $125 million(*6) with the width in range reflecting some uncertainty in the challenging industry cost environment. Approximately $1.45 billion(*7) of FY23 revenue is already secured.
FY23 capex is forecast to reduce to approximately $194 million which is sustaining and extension capex. The high level of investment in FY22 is expected to support earnings growth in FY23 and, coupled with the lower capex requirements, the Company is positioned to deliver improving financial returns towards its longer term targets. With the expected improvement in ROACE and balance sheet, the Company will be well positioned to take advantage of future opportunities that align with delivering on its strategy.
*** ENDS ***
Notes
1. Underlying EBITDA is earnings before interest, tax, depreciation and amortisation from continuing operations and excludes various one-off items. A reconciliation of Non-IFRS financial information is contained on slide 27 of the Company’s Full Year Results Presentation
2. Underlying EBIT(A) is earnings before interest and tax from continuing operations and excludes various one-off items. A reconciliation of Non-IFRS financial information is contained on slide 27 of the Company’s Full Year Results Presentation
3. Net operating cash flow excluding interest and tax and M&A costs.
4. Gearing = Net Debt / (Net Debt + Equity)
5 (*5). $5.0 billion order book as at 30 June 2022; excludes Batu Hijau Phase 8 (preferred), short term civil and underground churn work which do not take into account future contract cost escalation recoveries.
6 (*6). Guidance assumes an exchange rate of AUD:USD 0.72 and excludes one-off items and amortisation related to the GBF and Martabe acquisition
7 (*7). Secured revenue excludes short-term civil and underground churn and does not take into account future contract cost escalation recoveries
8. Return on Average Capital Employed = Underlying EBIT(A) / Average ((Total Assets excluding Cash) – (Current Liabilities excluding Debt))
9. Underlying NPAT(A) is earnings after interest and tax from continuing operations and excludes various one-off items and amortisation of customer contracts relating to GBF and Martabe acquisition. A reconciliation of Non-IFRS financial information is contained on slide 27 of the Company’s Full Year Results Presentation
10 (*10). Revenue guidance does not take into account future contract cost escalation recoveries
Notes taken from today's FY22 Results Release Announcement by Macmahon (MAH).
Disclosure: I hold MAH shares. I did also hold MACA (MLD) shares, but I sold them all yesterday. I also hold NRW (NWH) shares. MACA and NRW are competitors of Macmahon. All three companies provide contract mining for mine owners, and MACA (MLD) also specialise in gold mining (as do Macmahon). Macmahon's NTA (net tangible assets) per share as at 30-June-2022 had increased to 25.2c/share (as shown on the "Balance Sheet" slide above) and they closed today at 17.5c/share, being a 30.6% discount to their NTA. MACA (MLD) were also trading at a good discount to their own NTA and then Thiess recently lobbed in a takeover offer priced at $1.025 cash, being quite a bit higher than where MLD had been trading at the time. NRW (NWH) promptly offered the MACA (MLD) Board $1.085/share, which could be taken as all cash, all scrip (NWH shares) or 50% cash and 50% NWH shares. The MACA Board declared that the $1.085/share NRW offer was NOT superior to the $1.025/share Thiess offer because it involves shares. The MACA Board failed to point out to their own shareholders that they did not HAVE TO take any shares because one of the three options available under the NRW offer was 100% cash. The market has clearly decided that MACA are not going to be taken over at $1.025 but rather at a price much closer or above the $1.085 that NRW is offering, because MACA has been trading at between $1.05 and $1.075 since that NRW offer was made public (by NRW late last week) and MACA provided their initial response to it. Prior to that MACA was trading no higher than $1.01/share. They closed today at $1.075, being a new year high.
As there is still some uncertainty as to who is going to take over MACA and at what price, I have sold out and locked in my profit at the higher prices available this week. According to their announcement today, despite their $1.025 offer having been open for a fortnight already, Thiess have so far only received acceptances representing just 4.81% of MACA (MLD) so far, suggesting the majority of shareholders are holding out for a higher offer. And now that MACA is trading on-market at prices significantly higher than Thiess' $1.025/share offer, Thiess would be unlikely to be getting a flood of further acceptances now when people can just sell their MLD shares on-market for a higher price.
I didn't hold any MACA in my Strawman virtual portfolio, having sold out previously to top up my MAH and NWH positions, who I consider to be superior companies with superior management.
My point here is that a company like Macmahon (MAH) will not continue to trade so far below their own book value forever. Particularly when they keep increasing their book value every year. At some point either MAH will get positively rerated by the market, or a competitor will take them over, or try to. But something has to give eventually, just as it has done recently with MACA (MLD).
https://www.macmahon.com.au/news/nadine-linnartz-project-engineer-deflector-underground-mine-wa/
21-Aug-2022: Most of the Macmahon Board and Management have joined the company in the past 5 years, since they turned decidedly pear-shaped in that 2015 to 2017 period and fended off the opportunistic takeover attempt by CIMIC Group in 2017 that I discussed in my Bull Case straw earlier today.
Eva Skira is the only current board member to have been appointed prior to the new CEO & MD's appointment (i.e. Mick Finnegan) in November 2016.
Denise McComish is also a non-executive of Webjet (WEB) and Gold Road Resources (GOR) (appointed to both boards last year - in March and September 2021 respectively).
Alex Ramlie and Arief Sidarto were appointed to the MAH Board by MAH's largest shareholders PT AMNT in 2017 when they bought their 44.3% stake in Macmahon and awarded Macmahon the mining contract for the huge Batu Hijau copper/gold mine in Indonesia, which was then and still remains today Macmahon's largest ever mining contract.
To get a sense of just how big that pit is, click on the image to make it larger and check out how small those massive haul trucks are in comparison to the pit. And Batu Hijau has more than one pit.
Alex Ramlie is concurrently the President Director and Chief Executive Officer of PT Amman Mineral International (AMI) and a Commissioner of AMI's subsidiary, PT Amman Mineral Nusa Tenggara (PT AMNT), which operates the Batu Hijau Copper/Gold mine in Indonesia.
Arief Sidarto is also a director of AMNT.
A fair selection of women on both the board and in KMP positions, particularly for a mining services contractor where it has traditionally been a male-dominated industry.
Macmahon do take gender diversity seriously, as well as equal opportunities for indigenous Australians.
See here: Shelley Dimer DTO Trainee, Telfer - Macmahon
and here: Thellie Tatow RTO Advisor, Telfer - Macmahon
You can explore that further by clicking here and browsing through their website:
About Us - Macmahon [ https://www.macmahon.com.au/about/ ]
Anyway, my point is that when you look at metrics like this:
and this:
...it pays to keep in mind that Mick Finnegan only took on the top role at MAH late in 2016 and the majority of the current board and management were appointed after that, so MAH has been a successful turnaround since 2017 and I don't think the mistakes that prior management made prior to then are going to occur again in the future, in particular they won't be going to load up on debt during a mining boom only to have it almost drive them to the wall when the boom goes bust, and secondly they are structuring their mining contracts a LOT better these days, with the ability to pass higher expenses through to their clients and they now avoid being locked into contracts where they can actually lose money - as was previously the case at Telfer (working for Newcrest).
This was evident in the dispute Macmahon had with Newcrest over that Alliance (Life-Of-Mine) contract at Telfer where a couple of years ago they were prepared to walk away from the contract if Newcrest didn't agree to vary the terms and conditions to allow MAH to actually make money and at the very least always cover their own costs at Telfer. After having a scout around and realising that nobody else was seriously interested in that Telfer contract (it's a horrible place to work according to my brother who has done a number of shuts [shut-down jobs] there as a heavy duty plant mechanic), at least it became very evident that nobody was interested in the mining contract at Telfer for the rates that Macmahon had been working for, Newcrest came to the party and agreed to restructure the contract with improved rates and a guarantee that ALL of Macmahon's costs would be covered as a bare minimum. This was Mick and the Macmahon Board drawing a line in the sand and saying Macmahon would NO LONGER perform work that was loss-making, and the results of this stand are evident in their improving metrics every year since, particularly their increasing net profit margin (NPM), ROE and EPS.
About Mick Finnegan, the CEO and MD of Macmahon:
Mick holds a Bachelor of Science (Mining) with 20 years’ experience in the mining industry. The last 15 years have primarily been spent in senior line management positions. Mr Finnegan has a strong commercial and technical background and has spent time in operations on the east and west coast of Australia as well as a number of countries throughout Asia.
It is his Asian experience and connections throughout Asia, especially in Indonesia and PNG that enabled him to line up PT AMNT to rescue Macmahon from the attempted takeover by CIMIC not long after he took over the top job at Macmahon. To be clear, being taken over by CIMIC in 2017 at 14.5 cents/share would not have been a good outcome for Macmahon shareholders. Speaking of which, Mick holds just over 5 million MAH shares, currently worth less than $1m, and he owns more than every other board member.
However there are long term incentive (LTI) arrangements with Mick and other senior executives at Macmahon (agreed to by shareholders at their 2018 AGM) that align those executives' interests with retail and ordinary shareholders' interests - in terms of share performance rights (that are equal to ordinary fully paid MAH shares, and would be swapped for those, bought on-market by the company, if and when the performance rights were earned) being granted only if certain hurdles were met and those hurdles being reasonably hard to achieve and all involving increased Total Shareholder Returns (TSRs) - as follows:
That's a small excerpt - Below is that entire page:
And that was just part of an Annexure to the announcement - the full announcement can be viewed by clicking on the link below:
Steve Johnson from Forager said at the time (because Forager's Australian Shares Fund [FASF, ASX: FOR] held a decent position in MAH) that while that does look very generous to MAH Senior Management, shareholders would do well if those hurdles were met and those Share Performance Rights were indeed granted, so as a Macmahon shareholder, FASF supported them at the time. Indeed, I can't think of a much better hurdle for management to jump over than decent Total Shareholder Returns over multiple-year periods.
So in terms of skin in the game, they have plenty, and the incentives are well aligned with our own interests as MAH shareholders. Obviously those total shareholder returns have been underwhelming over the past 4 years, and that's why Mick still doesn't own a hell of a lot of MAH shares because the hurdles were not met, and the shares were not earned, but I actually don't mind this sort of incentive structure at all. I would like to see them set up something substantially similar in the future, as that 4-year period is now coming to an end.
Also, if you read through the entire announcement (link above), there are other positives, such as a clear focus on interest alignment with both the board (through their own remuneration arrangements) and the senior management. And the fact that all of these shares would be bought on-market by MAH, so no new shares would be issued as part of this share-based remuneration.
From page 1 of the announcement:
This share ownership policy was adopted by the Board on 09 May 2018 and stipulates that, in order to increase alignment between the interests of Non-Executive Directors and the interests of shareholders, Non-Executive Directors should have a shareholding in Macmahon (directly or indirectly) that meets or exceeds the following minimum values (determined based on the volume weighted average price of Macmahon shares on ASX over the 30 calendar day period prior to the most recent financial year end) within the following timeframes:
- (a) 25% of their remuneration value within the latter of one year after their initial appointment as a director and 30 June 2019;
- (b) 50% of their remuneration value within the latter of two years after their initial appointment as a director and 30 June 2020;
- (c) 75% of their remuneration value within the latter of three years after their initial appointment as a director and 30 June 2021; and
- (d) 100% of their remuneration value within the latter of four years after their initial appointment as a director and 30 June 2022.
All shares to be acquired by participating Non-Executive Directors on vesting of share rights will be acquired on-market (and will not be newly issued shares). Accordingly, the NED SSP will not dilute existing shareholder interests and shareholder approval under the ASX Listing Rules will not be required for Non-Executive Directors to participate in the NED SSP.
--- end of excerpt ---
I like that a LOT.
So while things haven't panned out exactly as they had hoped, the incentive structures were there, and they were well crafted and created great alignment of interest. And if the (TSR) hurdles for Senior Management HAD been met, they would own a lot more MAH shares now and the share price would also be a lot higher due to the excellent TSRs we would all have enjoyed.
That's why I'm hoping they'll renew this arrangement with something substantially similar when it expires shortly (times out).
Management quality and track record, including their track record of making sensible capital allocation decisions (particularly with regard to M&A), and alignment of interests in terms of their remuneration arrangements, are things I consider very important, and MAH ticks all of the right boxes here.
Looking forward to their full year report for FY22 on Tuesday.
Disclosure: I obviously hold MAH shares.
21-Aug-2022: I hold Macmahon (MAH) shares, and I like the company a lot. They are the go-to contract miners for Australian (and, to an extent, also Indonesian) gold and copper-gold miners, they tend to negotiate LOM (Life-Of-Mine) contracts that embed them as partners with the mining company that owns the mine, and this gives us a fair amount of visibility around their future revenue, something that is often hard to determine or estimate with many other mining services companies.
https://www.macmahon.com.au/investor-hub/
Macmahon Euroz Hartleys Conference Presentation [09-March-2022]
Firstly, here's their client list, and how that has grown over the past 4 years which has been partly due to acquisitions.
Note that Boston Shaker is the underground mine at Tropicana, hence the same clients for both. Tropicana is the open pit mine there and Boston Shaker is the underground extension of that gold mine. Traditionally Macmahon have been open pit mining specialists, however they acquired GBF in 2019, an underground mining specialist company (who also focused mostly on gold mining companies as clients) and that acquisition also bought clients like Silver Lake across to MAH. The guys who founded and built up GBF came with the company and still work for MAH, and the integration has worked well.
Macmahon goes underground with GBF tilt | The West Australian
Macmahon buys GBF for $48m-plus (businessnews.com.au)
Prior to the GBF acquisition, MAH bought another company, TMM Group, back in 2018. TMM Group was a Brisbane-based group of companies that provided civil construction and operations and maintenance services to the Queensland coal mining industry. Macmahon stated at the time that the acquisition of TMM would provide them with additional civil capability that they expected to be an enabler to core mining work through contracts for initial site earthworks and construction services, as well as the ability to target site rehabilitation projects.
Macmahon to acquire TMM Group - Mining Magazine
They did not disclose the purchase price (for TMM) at the time of the acquisition.
Macmahon to acquire TMM Group (irmau.com)
Looking back at those two business acquisitions now, GBF was certainly purchased for a very good price from Macmahon's perspective, and I assume TMM was also, and the two acquisitions have really propelled Macmahon into now being full service miners for the gold sector and other sectors, with other mining services available as well (such as site prep, construction and site rehab).
The next slide shows how they've grown their order book (work in hand) but how their EPS growth and their share price have significantly diverged. In other words, their share price has gone down while the core metrics of the business have been improving.
Here's an overview of the business:
They are slated to report their FY22 full year results this coming Tuesday (23-August-2022) by the way.
Here's what the company has delivered over the past 4 years in terms of revenue and earnings (profits).
Here's their strategy for the next few years:
The following shows how 78% of their revenue in the first half of FY22 was derived from working for either Gold miners or Copper/Gold miners (22% from "other" miners), and how they plan to diversify this revenue in the future in terms of commodities.
And the following shows how they plan to further diversify their revenue in terms of the types of work they perform for their clients.
They do have a "People" focus, which I do appreciate. I believe that positive company culture is very important and provides companies with a competitive edge. We hear often about people who leave companies describing the culture as toxic and the management in far from flattering terms ("Glass Door" reviews and so on) and I really want to avoid companies like that who do not value their employees properly.
The first slide below shows Macmahon's commitment to employee development, and the one below it also touches on positive culture and how Macmahon not only view workplace sexual harassment as unacceptable, but also as a serious safety hazard. Classifying something as a safety hazard can only give it even further focus and scrutiny as keeping employees safe and reducing or eliminating accidents, injuries and incidents is so important in terms of key performance indicators these days. Lost time injuries (or LTIs) is something that almost every company is very focused on reducing. Apart from it clearly being the right thing to do, there is also an economic reason to do this. Many of these companies are self-insured, and the cost of insuring their workers ("work cover") is directly linked to the number of LTIs they experience each year, as well as the company's ability to prove to their insurers that they have good enough policies and procedures in place to keep their workers safe and free from harm. And that does include making sure all employees know the importance of safety, what it means, and how to achieve and maintain a safe workplace environment. That now includes eliminating bullying and all forms of harassment.
Those who are not self-insured have to pay fees to the relevant state government body (such as "WorkCover" here is SA) and once again their fees are linked to their safety record.
There is also often a lot of focus on keeping people safe and providing an inclusive and supportive working environment for everybody that comes from the top - from company Boards, as part of their good governance and oversight responsibilities, so the message is reinforced from the top down with the better companies. Instead of just being posters on the walls and company policies, it should actually translate to the frontline (or "coalface") workers feeling safe and respected at work, and knowing what they need to do to sustain that. And the company also needs to have a well promoted and easy-to-use whistle-blowers policy and system so that people can feel free and confident to easily speak up and report abuse and harassment, etc., and it can be dealt with in a timely and effective manner without any victimisation.
The following shows how Macmahon is incorporating new technology into their business and that they have a focus on embracing this tech, as well as reducing carbon emissions produced by their fleets of earthmoving and mining equipment.
This is how they like to summarise themselves:
And now, some background. I knew about Macmahon before I read about the reasons why Forager (ASX: FOR) invested in them, but that did open my eyes a fair bit to the opportunity. Back in 2017, while Forager had a substantial investment in Macmahon, CIMIC Group (the renamed Leightons Holdings) tried to take Macmahon over.
CIMIC unveils takeover offer for Macmahon - Australian Mining [14-Jan-2017]
That takeover was at 14.5 cents per share, valuing Macmahon at $175m. Forager and other shareholders thought this offer was too low and very opportunistic and encouraged the Macmahon board to reject it. I think everybody knows who CIMIC was, and also Leighton Contractors/Leighton Holdings (their previous company names), but for anybody who doesn't (living under a rock perhaps) suffice to say that CIMIC are no longer listed on the ASX, having been taken over in May this year by their controlling German shareholder Hochtief, which is (in turn) owned by giant Spanish contractor Grupo ACS. [Cimic’s 60-year ASX reign ends (afr.com)] [May 2022]
Because CIMIC already owned over 20% of Macmahon when they launched their takeover bid, it was a hard one to defend, but Macmahon did it, with a lot of help from Indonesian mining company, PT AMNT, whose subsidiary Amman Mineral Contractors (Singapore) Pte Ltd bought 44.3% of Macmahon and awarded them their largest contract ever, the US$2.8 billion mining contract for the Batu Hijau copper/gold mine in Indonesia. This issue of new shares to PT AMNT also had the effect of diluting CIMIC's ownership of Macmahon and providing a larger shareholder who could veto CIMIC's intentions regarding the MAH Board and ownership. However, just as people had previously been wary of investing in CIMIC because so much of CIMIC was owned and therefore controlled by Hochtief who were themselves owned by Grupo ACS, people also became wary of Macmahon when 43% of Macmahon became owned by a previously little-known (to ASX retail investors and most Australian fund managers at least) Indonesian mining company (PT AMNT).
The past five years have however shown that AMNT have been very supportive shareholders of MAH and have not attempted to interfere in the way Macmahon has been managed or with Macmahon's strategies.
It is probably instructive to have a browse through the historic timeline that Macmahon provide here: https://www.macmahon.com.au/about/our-history/
OK, now for some historical metrics. The first lot is from FNArena [https://www.fnarena.com/index.php/analysis-data/consensus-forecasts/stock-analysis/?code=MAH]
Of the seven brokers that FNArena covers (UBS, Credit Suisse, Morgan Stanley, Ord Minnett, Macquarie, Citi and Morgans), Macquarie is the only one that covers Macmahon Holdings (MAH). The following are the FNArena's summaries of what Macquarie have said about MAH in every client update back to the beginning of 2015, in reverse-chronological order, so latest first, oldest last.
You will see that Macquarie ceased coverage of MAH back in late February 2015, then re-initiated coverage in June 2021. Their latest update is directly below where they have reduced their target price (TP) from 30c/share down to 20c/share and maintained their "Outperform" rating. The main reason for the TP reducing is "cost and labour headwinds, and increasing competition continuing to impact on margins" across the mining services sector. They add that in a worst-case scenario, labour shortages could see providers default on contracts. It should be noted that this is a sector view taken by Macquarie and is not specific to Macmahon, although it HAS impacted Macquarie's TP for MAH.
And this is from Commsec [https://www2.commsec.com.au/quotes/financials?stockCode=MAH&exchangeCode=ASX#/financials/company]
So I think this all demonstrates that Macmahon as a company have very decent metrics and most of them are improving, but that they operate in a sector that has some headwinds. Their FY22 full year report on Tuesday will be instructive, in particular about whether they have been and are still able to pass increased costs on to their clients or are instead making less money due to reduced margins. I suspect they have structured contracts so that they are able to pass most or all cost increases through to clients, but we shall see.
Finally, regarding their largest contract the Batu Hijau alliance mining contract for PT AMNT in Indonesia, there is a profit sharing element that highly incentivises Macmahon senior management to ensure that the contract performs well. I won't go into too much detail about that other than to say that Steve Johnson at Forager Funds was alert but not alarmed when he responded to it a few years ago. While a lot of money in the form of profit-sharing bonuses could go to senior management at MAH, Steve points out that for that to occur, Macmahon would have to perform exceptionally well, and that should in all likelihood be reflected in an increased share price, so there would be benefits to ordinary shareholders as well, even though the bonuses did appear to be exceptionally generous. The main point was that the bonuses had to be earned and the hurdles were reasonably high, and were based on increased profits, so all-in-all, a good alignment of interests between company management and ordinary shareholders in Macmahon.
I hold MAH shares. My two favourite mining services companies who do the actual mining for mining companies are NRW Holdings (NWH) and Macmahon (MAH), and I hold shares in both of those companies in multiple portfolios.
I am also obviously a gold bull, so Macmahon's exposure to that industry is also a positive in my view, although I do note they are planning to diversify more away from gold and copper/gold miners in the future for risk management purposes.
Macmahon are cheap at current levels in my opinion (sub-20c and particularly down around 16 to 18c/share). They are in a sector that is not loved much by the market at this point in time, but they are one of the better operators in that sector and could be viewed as one of the babies that's been thrown out with the bathwater.
They are now paying dividends, which are increasing every year, they have decent metrics which are heading in the right direction, and they are well placed to navigate through the well-known current industry headwinds of higher costs and labour shortages.
They are also well placed to rebound strongly when sentiment around mining services companies turns positive once again.
Further Reading:
Contracting a Strong Result - Forager Funds [October 2019]
Cost Pressures Slam Mining Contractors - Forager Funds [June 2021]
Macmahon shareholder Forager Funds says CIMIC bid is too low (afr.com) [January 2017]
Edit: I have just made some minor grammatical changes, and one correction, which is that I had incorrectly said that Forager had encouraged the Forager board to reject CIMIC's takeover offer, and I have now changed that to read that: Forager had encouraged the Macmahon board to reject CIMIC's offer, which makes a lot more sense.
Of course, that means I've lost all 8 votes already received for this straw, so I'd encourage those who have already voted up this straw to do so again if you're no longer listed as having given it an upvote. Votes don't mean that much to me but it's a good way for people to find decent content on the basis that the more votes something receives, the more likely that it is worth taking the time to read (or skim through at least). That's the way I think about content here anyway.
09-June-2021: I am no longer a shareholder in FOR - the Forager Australian Shares Fund (FASF) LIT (listed investment trust), however I do follow what they are holding. Currently their portfolio includes two mining services companies - Perenti Global (PRN), which used to be called Ausdrill, and Macmahon Holdings (MAH), a company that FOR have held for at least 7 years - I also hold MAH, but not PRN, as I am still a little wary of Perenti from their Ausdrill days and concerns I had about them back then, including corporate governance issues. The following is a link to a weekly video from FOR in which Steve Johnson talks with Alex Shevelev about mining services as a sector (and the opportunity and risks of investing in the sector currently) and those two companies in particular.
Labour costs are continuing to inflate around the country while miners are buoyed by high commodity prices. So where does that leave mining services companies?
Forager Chief Investment Officer, Steve Johnson, talks to Forager Australian Shares Fund (FOR) senior analyst, Alex Shevelev, about the Fund's investments in mining services companies Macmahon (MAH) and Perenti (PRN) in this short video:
7-June-2021: Forager: Cost Pressures Slam Contractors (and Maybe the Rest of the Country)
14-Aug-2022: Disclosure: I hold MAH shares.
03-Mar-2021: St Barbara appoints Macmahon as new underground mining contractor at Gwalia
SBM have appointed MAH as their new underground mining contractor at their flagship Gwalia mine in WA, replacing Byrnecut, a private company who has been providing that service for many years. In their report last week (Tues 23-Feb-2021), Macmahon talked about their huge tender pipeline, and it is reasonable to expect them to win a fair percentage of those tenders, particularly with gold miners (like SBM), as Macmahon are now the leading listed gold mining contractor in Australia, both for underground (UG) and open pit (OP) mining. I hold SBM and MAH shares.
MACA (MLD) is the other ASX-listed contract miner who also specialises in the gold mining industry, and both MAH & MLD have the majority of their revenue coming from Australian ASX-listed gold miners. NRW Holdings (NWH) are also active in the sector, but the majority of NWH's contract mining clients are actually iron ore miners now, not gold miners. MLD are close to a 50/50 split between gold and iron ore, but I believe the majority of their revenue still comes from gold, and MAH are clearly working mostly for gold and copper/gold miners.
24-July-2021: I did originally place this straw under MLD in error, and I am now adding it under MAH. I have also updated that last paragraph to reflect that NRW Holdings is no longer exposed as much to the gold industry as they used to be.
Disclosure: I currently hold shares in MLD, MAH and NWH.
