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 MARKET REPORTS |
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Stocks
Stock of the week – Macmahon Holdings
September 08, 2008
Tim Morris, wise-owl.com analyst
Company: Macmahon Holdings Ltd
Code: MAH
Recommendation: Update
Market Cap: $800m
Leading into the reporting season investor sentiment towards mining services had cooled following several profit downgrades from companies operating in the sector. Although the broader demand outlook remained bright, investors begun to fear that cost pressures and labour shortages had reached a significant inflexion point. However with most companies operating in the mining and infrastructure services space meeting or exceeding earnings expectations, the sector has become a clear out performer over recent weeks.
ASX200 member Macmahon Holdings is no exception, and following its full year results last month, is within sight of its 2007 all time high of $2. The FY08 result was a blockbuster with net profit rising 46% to $48.8m. The bottom line was driven by a 29% lift in revenues to $1.2bn, and a lift in profit margins from 3.5% to 3.9%. Importantly for shareholders earnings per share increased 43% to 9.2c and return on equity improved from 15.8% to 19.4%.
It hasn’t always been so rosy for shareholders, as the company has experienced its fair share of downturns in what has, in the past, been a cyclical industry. 1992-94 and 1999-01 were both challenging loss making periods for the company, resulting in a mixed long term performance for the share price. However a new look management team at the start of the decade, combined with the China-led revival of commodities prices from 2003 has blown a breath of fresh air into Macmahon over recent years, as seen in its latest result.
A Deeper Look into the Result
The company operates two key divisions, and driving this year’s result was the smaller of the two – the construction division. The division provides services across the many facets of civil engineering such as road, rail and water infrastructure. Operating earnings in the construction division soared 138% to $38m on the back of strong revenues and margin expansion. Macmahon’s larger segment – mining, also grew but at a more modest pace. Mining EBIT rose 7.5% to $54.4m thanks to stronger revenues, however margins came under pressure due to the much publicized heavy rains in Queensland, which impaired work completion for several key clients.
On the reasonable assumption that these weather events do not repeat, the mining business has the potential to shine brightly along with construction during the year ahead, which bodes very well for earnings. Management forecasts echo our view’s, with the company predicting net profit to grow in the range of 20-30%. Supporting this growth profile is Macmahon’s order book, where contract wins throughout the year have maintained it at record levels of $2.1bn. This figure excludes the $1.1bn contract win with Moly Mines (ASX code: MOL), which is subject to Moly securing project financing for its Spinifex Ridge Molybdenum mine. Plans to raise the $1bn required to fund project development have been delayed due to market conditions, however in recent week’s the company has begun to seek $150m interim financing to ‘get the show on the road’ in the mean time.
The Future
Large contracts such as Moly Mines are set to become Macmahon’s target moving forward following last year’s agreement with Leighton Holdings (ASX code: LEI), which saw Leighton acquire a 14.9% stake in Macmahon. The agreement between the companies will see Leighton promote Macmahon as a partner of choice for large infrastructure and resource related projects.
On the corporate front, Macmahon has also been making its own advances, launching a takeover offer for drilling contractor Ausdrill (ASX Code: ASL). Macmahon has offered Ausdrill shareholders 1.65 MAH shares for each Ausdrill share. The all scrip offer has been declared final and closes on September 16. At last count, Macmahon had secured acceptances totalling just over 9% of Ausdrill shares. With Ausdrill’s board continuing to recommend that shareholders reject the offer, it will be interesting to see how the battle unfolds as the deadline approaches over the coming weeks. For Macmahon, the takeover attempt is significant as Ausdrill would contribute over 40% to the combined group’s earnings.
The Share Price
Although the takeover provides some distraction for management, we are recommending that our members continue to hold Macmahon given its attractive earnings outlook. Trading on a PE of 20, the stock is not a stand out bargain, but has more than enough earnings potential to support its valuation. Technically the stock is nearing the top of its 12 month trading range which is within sight of all time highs, however a clear break above this $2 level would be a bullish sign.
Should this optimistic scenario play out, we would alert members of the appropriate time to take profits. When to sell is one of the hardest decisions that an investor faces, and given the fundamental and technical signals currently being broadcast, it is shaping up to be an important period for shareholders.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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