MACA Limited (ASX: MLD) is a Western Australia based company with an offering under two major segments, mining contracting and civil contracting. MACA's customers are predominantly based in Western Australia and are typically operating mid-size mining projects across a range of commodities.
In case you have never heard of this business and were wondering, ("MACA") stands for Mining and Civil Australia and they currently employ about 600 people, being a mix of employees and contractors. MACA was incorporated in 2002 and listed on the ASX on 1 December, 2011.
Is this business easy to understand?
MACA's mining contract division includes:
Loading and Hauling - Contract load and haul offering mine to mill solutions customized to meet their customer's needs.
Drilling and Blasting - Production drilling and blasting.
Crushing and Screening - Crushing mostly iron ore in simple and complex circuits.
MACA's civil contract division provides effective solutions across diverse applications such as dam construction, mine infrastructure works, road construction, airport runways and major earthworks projects.
Does this business have a sustainable competitive advantage?
MACA have done a great job in securing contracts for their contract mining and crushing services, some of which includes picking up new clients for iron ore, gold and base metals projects. MACA have also been successful in achieving contract extensions on existing projects.
MACA was awarded a significant long term mining services contract from Regis Resources Limited, which is expected to generate $450 Million in revenue over the next 8 years.
As of September 2011, MACA had $1.295 Billion worth of work on hand between now and the year 2020, with the average project tenure being 37 months. Some of this work in hand will provide the opportunity for further project extensions.
I am expecting MACA's revenue for the 2012 Financial Year to be in the vicinity of $333 Million.
This is made up of $263 Million as presented on 9 November 2011 at the North West Shelf Conference plus a net increase of $70 Million announced on 8 December 2011 from projects due to mature this financial year. I am more conservative in valuing this stock and basing it on a revenue figure for the 2012 Financial Year of $305 Million at the moment.
I am anticipating $130 Million revenue in the first half and will be looking forward to their half yearly report due out in the near future. It will be interesting to see.
I have based my intrinsic value calculations assuming a net margin will be 10% (last year was 10.94%). So I am valuing this stock based on NPAT of $30.5 Million for the full year.
What are the risks facing this business?
As a contract miner, MACA is exposed to a number of risks, including:
A reliance on the boom in our mining sector continuing
Commodity price fluctuations
Inability to complete projects to budget, resulting in a reduction in margins
A discontinuance of operations by a client
Uncertainty about winning future contracts, despite their recent success and expertise
Is it run by able and trustworthy management?
Yes, management is very experienced and, I think, trustworthy as well. From the time this business listed on the ASX, there has been a consistent message coming from Chris Tuckwell (Managing Director) and Andrew Edwards (Non Executive Chairman). This message speaks loud and clear and it is a message of under-promising and over-delivering.
MACA forecast in their Initial Public Offering (NYSEARCA:IPO) that revenue in the 2011 Financial Year would be $242 Million which was surpassed by an actual revenue result of $249.2 Million. Similarly, their actual Net Profit after Tax was $29.7 Million, which exceeded their IPO prospectus figure of $23.1 Million.
Is it trading at a bargain price?
My calculations suggest this business is trading at a bargain price. The share price closed on Friday 10 February, 2012 at $2.28. I have a current valuation on MACA of $3.92 for June 2012. (This valuation is subject to change on a daily/weekly basis).
I do question if my normal conservatism differs from the market when it comes to the risks that this business faces. The market seems to be pricing in a bigger impact from the risks mentioned above to MACA 's business which will most likely come if the economic situation in Europe deteriorates, which would have a flow on effect to China's economy, and in turn, commodity price falls and a softening in our economy.
MACA has won some impressive contracts recently, and a big part of their financial success will come from completing these projects to budget so as to maintain their profit margins. If they can operate their projects efficiently, their profitability should continue. Perhaps I am putting too much faith in management to keep under-promising and over-delivering - time will tell! While I do believe that share prices follow value in the long run, in the short term there is no guarantee that price will follow value. The current risks surrounding the global economy may keep MACA's share price in check for the time being.
In summary, MACA is a well run business with growing revenues confirmed from recent contract wins, and has delivered strong profitability to date. These strong profit levels are forecast to continue and MACA generated positive cash flow last financial year. They also currently have no net debt. Management, since listing on the ASX, has under-promised and over-delivered, and it is currently trading at a discount to my estimate of intrinsic value with the current estimate of intrinsic value rising in 2013.
Disclosure: Dean Mico does own shares in MACA Limited.
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