Contract Miner MACA Waiting To Be Noticed

This story features MACMAHON HOLDINGS LIMITED. For more info SHARE ANALYSIS: MAH

By Chris Shaw

Mine to mill contract mining services group MACA Limited ((MLD)) listed on the Australian market on November 3, having raised a total of $60 million via new shares offered at $1 each. New shareholders will hold 40% of issued capital, while the shares held by existing shareholders are under escrow for 12 months.

MACA Limited services the iron ore, gold and base metal sectors, with services offered predominantly to mid-size mining projects. DJ Carmichael has initiated coverage on MACA limited with a Buy rating and a valuation based price target of $1.93, seeing a number of positives for the company. These include compelling value at current levels and the potential for future contract wins and extensions to offer some upside risk to earnings estimates.

As DJ Carmichael notes, MACA has its business structured around four divisions – contract mining, crushing and screening, civil works and material haulage. Of these the contract mining and crushing screening operations are the most significant, currently accounting for about 87% and 13% of FY10 revenues respectively.

MACA is expected to generate revenues for FY11 of $242m, DJ Carmichael noting this would be an increase of 56% from FY10 results. Around 98% of this should come from existing contracts, MACA currently servicing 10 contracts for eight clients at present.

The order book totals around $500m and extends over six years and is currently centred in Western Australia. In the view of DJ Carmichael, this market offers scope for additional opportunities, while organic expansion into other geographic regions is also expected over time.

The recent initial public offering should help in this regard, as DJC notes there is now sufficient capital to fund future growth. As management has a solid track record and there is a strong pipeline of new projects due to be developed in coming years, MACA is seen as well positioned to achieve its goal of adding new contracts and so growing its total work-in-hand.

Growth in the sector should ensure a number of opportunities, as DJ Carmichael notes annual growth in the Australian mining services sector of around 6.9% between 2005 to 2010, while contract mining turnover in Australia in 2010 was around $7.1 billion.

At present the market for mining services contracts is very competitive but DJ Carmichael is of the view these competitive tensions will start to ease in 2011, as new capital works begin and quality labour constraints again become a key point of focus. Competition for MACA comes primarily from the likes of Macmahon Holdings ((MAH)), NRW Holdings ((NRH)) and some unlisted plays.

As competitive tensions ease, DJ Carmichael expects margins for MACA should start to stabilise, if not improve, from FY12. This supports the broker's earnings growth forecasts, its earnings per share (EPS) estimates standing at 15.6c in FY11 and 18.1c in FY12. This compares to the 14.3c achieved in FY10.

On DJ Carmichael's numbers, this would put MACA on an earnings multiple of around 9.4 times in FY11 and 8.1 times in FY12. This compares to an average earnings multiple of selected peer companies of around 14.1 times, meaning MACA is trading on a discount of about 33%.

According to DJC, such a discount is excessive, a discount of around 10% being more appropriate in its view given relatively higher capex requirements and the company's less diversified order book. This supports the upside implied by the broker's price target of $1.93.

Given its short history as a listed company and with a market capitalisation of just under $300 million, MACA receives little coverage in the broader market. As evidence of this, none of the brokers in the FNArena database provide research on the company.

Shares in MACA today are unchanged in a weak market at $1.48. Since listing the shares have traded in a range of $1.40 to $1.57.

Click to view our Glossary of Financial Terms