According to the Department of Industry, Innovation and Science, Australia’s earnings from resources and energy exports are forecasted to decline 7 percent from 2014–15 to $160 billion in 2015–16 and subsequently grow at an annual average rate of 3 per cent to $208 billion (in 2015–16 dollar terms) by 2020–2021. History has taught us that we should be careful with predictions, but given the cyclical nature of commodities, we believe there is scope for growth in the sector. However, not every company will do well, even if the resources sector turns around. If investors want transitional exposure to a turnaround in the sector, one such opportunity could be MACA Limited (ASX:MLD). The stock is up more than 50% year-to-date and also in positive territory over the past 12 months. Investors should pay close attention to companies that outperform in a bearish industry.
MACA Expands via Acquisitions
MACA Limited is a construction and services company that is focused on providing contracting, infrastructure and civil services to the mining and resources industries.
MACA signed a Letter of Intent with Regis Resources Limited in January 2016, to provide open pit mining services at the expanded Moolart Well project in Western Australia. MACA has been operating on the site since January 2010 and the latest award will result in continuation of its operations until January 2020. This project is expected to generate approximately $115 million in revenue.
In April, MACA entered into an agreement with the shareholders of Services South East Pty Ltd (SSE), a privately owned road asset management services provider for a 75% interest in the company. MACA is set to pay $1.35 million for the ownership and MACA will take on 75% of SSE’s existing debt facilities of $7.4 million. SSE currently has 3 long term maintenance contracts and MACA’s management is confident that this acquisition will add roughly $60 million worth recurring civil maintenance work.
MACA also acquired Alliance Contracting Pty Limited, a privately owned mining and civil services provider for $5 million in cash. Alliance has approximately $6 million worth Net Tangible Assets and debt facilities of $10 million. MACA funded this acquisition through existing cash reserves. The company anticipates its ‘work in hand’ to increase by approximately $50 million to $1.2 billion after the acquisition.
Challenging Conditions, but Outlook Brightens
The company reported a statutory net profit of $12.4 million, earned on the back of $208.5 million in revenue during the 1H16 period. The revenue declined 35% due to lower contract wins in a challenging environment faced by the mining sector. Subdued commodity prices and poor market conditions for financing the development of mining projects created a difficult operating environment for mining services and construction contractors, resulting in an ongoing margin pressure across the sector.
Operating cash flow for the six months ended 31 December 2015 declined to $30.6 million, from $63.8 million in the pcp. Capital expenditure of $27.6 million was spent on plant, equipment and inventory primarily associated with the Avanco and the Beadell Resources projects, which were initially signed in FY15.
The company has a history of distributing high dividends. The most recent distribution was a fully franked interim dividend of 4 cents per share, a payout ratio of 75%.
MACA anticipates its revenue to decline marginally from $450 million to $420 million in FY16, primarily due to the bleak market conditions in the first half.
Most resource companies have experienced challenging conditions during the past 24 months and unless activity picks up, we will likely continue to see falling share prices and further dividend cuts. However, with commodities at the bottom of the industry cycle, we favour the risk to reward ratio of the sector but mainly of those companies with a strong balance sheet and earnings. MACA’s order book at 2x revenue provides good financial visibility, totalling $1.2billion. The company has also increased its focus on gold projects, which have recently enjoyed strong momentum. Management has a strong track record of delivering shareholder returns and financial liquidity provides scope to grow via acquisitions.
|Simon Herrmann – Equity Analyst at Wise-owl
Simon is a financial advisor and analyst at Wise-owl. As an analyst Simon’s focus is the coverage of mid-capitalisation companies in the ASX300. His area of expertise includes information technology and cloud computing and his research reports are being featured on Bloomberg and Reuters.