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 MARKET REPORTS |
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Stock Picks
Big cap stock that defies market sell-off
April 17, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Macmahon Holdings Limited
Stock code: MAH
Current share price (04/17/08): $1.415
1 year high/low: $2.00/$0.785
This week Tim Lincoln profiles Macmahon Holdings Limited (MAH) and illustrates the importance of considering a stock’s market capitalisation when assessing a potential investment opportunity.
Macmahon Holdings Limited (MAH)
Operations
Macmahon Holdings Limited (MAH) operates in the mining and civil construction sectors.
The company consists of two key business units: mining and construction. The mining business provides a total service for open cut and underground operations, managing mines for major customers in Australia, New Zealand and Malaysia. The construction business undertakes key infrastructure projects including roads, bridges, railroads, ports and dams.
Investment Opinion
MAH has been a steady performer over the last three years delivering an EPS growth rate of more than 50% p.a. and an investor return of over 58% p.a. for the same period. This growth is set to continue in the coming years lead by its construction business. With a strong outlook and an undervalued position, MAH may be an attractive investment option for growth seeking investors.
Financials
MAH achieved a strong performance during its latest interim period and the company is in a satisfactory position of financial health. Net operating profit before tax and significant items rose markedly to $33.210 million for the period 1 July to 31 December 2007 from $17.373 million in the previous corresponding period as a result of an exceptional performance by its construction business. Pre abnormals EPS increased from 2.18 to 4.41 cents. This translates to EPS Growth of 102.29%. ROA also improved by 65.40% from 6.69% to 11.07%.
Valuation
MAH last closed at $1.415 at a PE ratio of 16.61 times, which when compared to the sector average of 11.89 times, suggests that the company is potentially overvalued at current prices. However, a PEG of 0.16 suggests that the premium being paid by the market on the company's earnings may be justified when the current rate of EPS growth is considered.
Outlook
The outlook for the company is positive with further growth forecast for FY08. The company expects its construction business to continue its exceptional performance, supported by increased spending and development within the mining and capital construction industries. Furthermore, its Memorandum of Understanding with Leighton Holdings accelerates growth opportunities. The company's mining business was also awarded the single largest contract ever - the $1.1 billion Spinifex Ridge contract for Moly Mines. According to forecasts MAH is expected to report EPS of 8.50 cents for FY08, a 35.14% increase from FY07. This would see the company trading at a PE ratio of 16.65 times and a PEG of only 0.47, maintaining its undervalued position.
Why is a company’s market capitalisation important?
A company’s market capitalisation is the total dollar value of all issued shares. Traditionally, companies with larger market capitalisations tend to experience less volatility in share price than stocks with smaller market capitalisations.
It is important to consider what size stocks suit your portfolio given your risk profile.
In our example above, MAH is considered a large cap company with a market capitalisation of $751.983 million.
Since hitting an all time high of 6853.6 on 1 November 2007, the All Ordinaries Index has fallen 19.52%*. MAH has fallen just 18.85% in the same period. It is important to note that financially healthy, undervalued companies with strong earnings outlooks tend to be more resilient in volatile market conditions and are often the first to bounce back once investor sentiment is restored.
Tim Lincoln is Managing Director of Lincoln, Australia's premier fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Click here to register to receive Star Gazing – Lincoln's Fortnightly Stock Tip.
More articles from this edition of CompareShares:
Superannuation: Keeping super and pension balances safe during market turmoil
Stocks: Big cap stock that defies market sell-off
Commodities: USD gold bull
Fundamentals: It pays to avoid dud stocks
Analysis: The biggest speculative bubble in world history has some unwinding to go
Resident trader: Trading for that big catch
Investing: Have we witnessed the market bottom?
Investing: Confounding connections – Aussie market following the US like a dog on a leash
Important information:
All Ordinaries Index: 1/11/2007 - 6853.6 (all time high), 10/4/2008 – 5515.5. Source: Stock DoctorŽ and www.asx.com.au.
Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 10 April 2008.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.
You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a managed fund, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.
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