MYE - Mastermyne

[mark100]

MYE is a recently listed specialist coal mining contractor. Recently announced a further contract win with Xstrata. Trading at <10x FY11 forecasts with almost all of the forecast revenue for FY11 locked in by existing contracts.
Wilson HTM reckon there is still upside potential to FY11 numbers with further contract wins.
Chart broke higher on Friday

[modandm]

wilson HTM were also the underwriters of the IPO...

i would look for some independent research

[mark100]

There is none because it is a very recent listing

I can't see any threads that you have started, modandm. Maybe you could put some stock ideas forward?

[mark100]

Two directors have purchased on market this week. Hope they weren't relying on the Wilson HTM report, even though it flagged potential for additional contracts 2 days before the Xstrata contract was announced to the market

[COLIN]

I also have tossed a few dollars at this one, Mark. I like the shape of the trend and various indicators, they exceeded their prospectus forecast, forward P/E is modest, and the business volume outlook seems healthy. Also, I am a great fan of companies where demand for their shares is significantly in excess of supply - and in this case we are now well clear of the post-listing shake-out.

I notice that modandm has raised a flag re perceptions as to Wilsons' objectivity or lack thereof. Fair enough, I guess, but I notice that they recently lodged an "Increase in Substantial Holding" Notice, covering increased investments in MYE by funds managed by them, including their Priority Growth Fund; I would have thought that they wouldn't want to jeopardise their reputation by placing their own clients' funds into a Fund of that nature unless they were of the opinion that the shares would outperform.

[COLIN]

Demand still heavily outweighs the number of shares for sale - but you can buy 68 shares if you are quick!

[mark100]

I got back into these yesterday and today, on the assumption that the ASX is due a relief rally and that MYE is one of the few companies around that will not only meet FY11 forecasts but provide decent growth in FY12. ROE is in the mid 20s. A recent WHTM update below (WHTM did the IPO)

Earnings growth and visibility remains under pressure for many industrial
companies, but not so for Mastermyne. The provision of specialist
services to the expanding coal production cycle, plus a positive earnings
outlook from contracts in hand, will support strong earnings growth over
the next 12 months. We are very comfortable with our EPS growth
forecasts of +22% in FY11 and +23% in FY12, which on a modest FY12 PER
of only 8.3x (EV/EBITA 5.9x), provides a good BUY opportunity.

Investment view. In its first year as an ASX listed company, we expect
Mastermyne to comfortably exceed its Prospectus NPAT forecast for FY11,
and enter a new period of growth in the period ahead. We have a high level
of comfort in our earnings forecastsand our BUY rating at $1.42 p/share.

Trading update. The key drivers of revenue remain highly positive for
Mastermyne, and we understand that the company is successfully capturing
the revenue and margin benefits from the sustained growth in demand for its
services. As an underground provider of services to the domestic coal
industry, poor weather has not impacted its operations, while the progressive
resourcing of new contracts and organic growth within existing contracts is
driving good economic returns across the business. Specifically, large
contracts (ie. Oaky Creek and KME) are now in the advanced stages of
ramp-up, and Mastermyne’s largest contract is well on the way to rollover of
another +2-years. With revenue expansion well supported and highly visible,
management are focusing their attention on margin optimisation, with our
earnings forecasts offering what we believe are well supported outcomes.

WHTM view. Mastermyne remains undervalued, particularly given its strong
organic growth outlook for FY12 and beyond (ie. further ramp-up and scope
expansions in existing contracts), and good prospects for additional growth
via new contract wins and geographic expansion (eg. into NSW, which we
understand continues to gain traction). We continue to see little risk to our
FY11 earnings forecasts (which are ~8% above Mastermyne’s IPO
prospectus NPAT forecast), and retain high conviction in the delivery of our
recently-upgraded FY12 forecasts. Mastermyne’s prudent approach to
managing its growth, and its focus on profitable expansion (ie. protecting its
margins) is encouraging, and we remain confident in the company’s ability to
successfully execute its next phase of strong growth in FY12 and beyond.

Earnings outlook. Our earning forecasts are unchanged and include EBITA
of $15.7M (+7% above Prospectus forecast) in FY11 and $19.0M in FY12.
This translates to Cash EPS growth of +22% and +23% respectively, with
earnings risk remaining skewed to the prospective upside in our view.

Valuation. We maintain our view that Mastermyne should trade on a
prospective EV/EBITA range of 7.0x – 7.5x. This supports our unchanged
price target of $1.90 p/share (ie. FY12 EV/EBITA 12.0x).

Recommendation. We retain a BUY rating and 12 month target of $1.90.

[mark100]

Merrill Lynch have set a price target of $2.12 for MYE with further upside from outstanding tenders possible

[mark100]

And back into these again last week at $1.35-$1.36. MYE has been trapped in a boring trading range (good for trading) for almost the past year.

A few days ago MYE announced a major contract win and said they would beat prospectus forecasts. WIH at the half year mark was already up around 30% on the 6 months prior so I expect FY12 should see some good profit growth, EU/USA recession or not. Trading at around 8x consensus FY12 earnings at present.

[soulman]

Not sure about trading MYE Mark. MYE is too illiquid and the dividend yield is too low for my liking.

MND and FGE, with the luxury of net cash/no debt is a better bet. MND just announced a $350 mil contracts win and down nearly a buck today. I will wait for their profit result next week.

[mark100]

Solid result from MYE. WIH is now up 70% on 12 months ago and 30% on where it was 6 months ago, underpinning very decent growth for FY12. I estimate EPS of around 18c for FY12 which is more certain than many other companies at present given MYE has long term contracts with major coal miners.

Soulman, I like FGE at present although you have to remember they are reliant on continually winning new work to replace completed project. MYE's work is much more stable as their contracts provide longer term services to underground coal mines. Once the mines are built there is ongoing work for the likes of MYE. MYE's forward PE of around 8 is pretty good value for that type of earnings certainty (well nothing is certain but some things more than others). As for MND is is simply too large cap and its PE too high for me to even follow. However I accept is has a great track record.

[mark100]

MYE has made a small move upward as news from the AGM filters into broker forecasts although it is still stuck is a year long trading range. They got a bit of a write up in todays small cap section of the AFR. I mainly talk to myself on this thread but I see MYE as offering good value growth with higher than average earnings certainty (for a small cap)

[buns]

I get the feeling everyone is trying to find another Forge?

In doing that, what would you look for? It’s really hard to identify competitive advantages of these young engineering service companies, and I get the feeling not many knew Forge’s to well at that time but got in because it was cheap and since then time the competitive advantages became more known.

MYE – from my 3 minute review.

Looks reasonable at first glance, not great, so not going to pursue.

I see FY10 ROE was only 14%, but FY11’s near double that. On the face of it you think tick tick – however their debt more than doubled, so is this ROE artificial?

Also the debt was used to fund a lot of capex, $3m worth or 1/3 of their operating cash flow in FY11.

Underground coal mining – everything about it is risky to me. Not something I would sleep on, or even feel super happy about funding.

They are also still small, these guys are going to get to the stage where to maintain those ROE’s they have to take on large projects – do these even exist? And if so can they make them economically profitable? Seems lots of service firms struggle at this stage..

Why not just buy something proven like FGE?

[buns]

I’ve noticed some of these names on the ANG, and FGE threads. Have you guys considered Cardno?

You don’t see many $500m market cap companies in mature industries start ramping up there ROE’s – this is a really unique thing and a huge sign of some kind of competitive advantage.

They have done it by somehow nailing an acquisition strategy like I’ve never seen. It started years ago, however is now in full drive with acquisitions becoming larger and more frequent – it seems nearly all of them have worked, and some even 1-2 years in. The profits from this are compounding, hence more and bigger acquisitions again.

What is amazing is they are winning all the private contracts everywhere they go, once government balance sheets recoup Cardno will be massive, proven and should snatch a lot of these mammoth pieces of work as well. Many of the firms who serve public sectors aren’t listed, and have got lost by the companies like Cardno who are consolidating.

Others are doing it, however aren’t doing it well with loads of write-offs, see Coffey.. Every country they operate in loves them, it enables them to strip the brand of new companies ASAP and move all the intangibles from the Cardno brand to that company right away – again, this will compound and strengthen with time.

In the meantime, growth will come from emerging nations where there aren’t many large engineering firms or much infrustructure, and where most can’t get that to work. Again, somehow Cardno does. Also I suspect Cardno will pick up a lot of the Coffey scraps in aussie as they head towards liquidation…

The management team is apparently second to none – Rodger Montgomery has stated they were some of the smartest he’s met.

Debt? Historically very low, especially for a company on a spending spree.

Are they good value?

PE of 9 and div of 6.5% - that’s enough for some?

Me? I think they are around 20% below IV and have that rising for a long time.

[buns]

Disc - do not own, because I see bigger discounts else where. But this could change.

[mark100]

Yes I like Cardno, used to work in their industry. Main concern with them is all the growth by acquisition over the years. It has brought a lot of companies unstuck in the past. CDD's debt is low because they have issued a huge amount of shares over the years to pay for acquisitions.

As for trying to find another FGE, I don't expect MYE is another FGE. FGE has grown fast but its contracts are shorter term in nature and growth requires the winning of even larger contracts over time. When all the mine expansions are over FGE will struggle to grow or even maintain its order book. MYE has work simply from coal mines being in operation, not the building of new mines.

Also, I consider FGE to be in a downtrend which I would not buy into. MYE has so far managed to tread water over the past year despite the poor overall market.

On MYE's debt/equity, from the CFO -
"Mastermyne is not a capital intensive business, each project that we win does not always require us to provide machinery, sometimes we will if we have any capacity in our fleet other times the client will provide the machinery, therefore capex is not always required to grow our business, the requirement for new equipment will depend on the type of projects we win and what we have available at any point in time.

The large capex spend in FY11 was to take advantage of the short lead times on equipment while demand for the equipment was increasing which was us trying to get in before an increase in lead times came about due to the increased demand. We have now seen these lead times increase significantly and are currently not looking at investing as much in the next twelve months to grow our business and meet our existing order book. The FY11 increased capex spend saw an increase in our Net Debt/Equity ratio as a lot of the equipment was either delivered late in the financial year or was still in progress and therefore had not delivered any revenue.

In FY12 as we start to see returns on these pieces of equipment we expect the Net Debt to Equity ratio to decrease on our position at the end of last year."

[mark100]

As for the 'competitive advantage' and 'IV' speak, I don't see Roger as a genius but a salesman. He has burnt many people over the years. Do you really know Cardno's competitive advantage? Unless you work in the industry no one really knows. Someone may have an advatage for a few years but then they lose it. Most of the engineering consultants that compete with CDD are unlisted and owned by staff. I know for a fact the unlisted and staff owned GHD earns higher margins than CDD

[buns]

It sounds like you know MYE a whole lot better than me, like I said I merely skimmed it and it didn’t pass my criteria. Those comments on capex requirements are reassuring.


As for the 'competitive advantage' and 'IV' speak, I don't see Roger as a genius but a salesman. He has burnt many people over the years. Do you really know Cardno's competitive advantage? Unless you work in the industry no one really knows. Someone may have an advatage for a few years but then they lose it. Most of the engineering consultants that compete with CDD are unlisted and owned by staff. I know for a fact the unlisted and staff owned GHD earns higher margins than CDD

I’m not sure what this means, are you saying these elements are strictly Rodger’s? Not at all.

Cardno is not a Rodger pick either, he has never really mentioned it expect for a quick statement saying the management team is very smart. It’s not something I would base my investment on. But I think there are definite signs this management team is very smart, as what they have done of late is something not many others have achieved.

That is making an acquisition strategy work. And as you say, it is a ‘concern’, but that concern makes Cardno better, because everyone else is failing with acquisition strategies except them. Through repetition, they are only going to get better at it. And with size, the benefits of scale and synergies just get easier with each purchase.

Cardno’s competitive advantage? It’s a tough topic. There is no doubting it is all about brand in this service industry. I defiantly think they are building a huge one if the success of this acquisition strategy can carry on. The long term strength of it has to rely on their brand as acquisitions will come to an end , but the acquisition strategy is the key element in building that brand by making it larger, and if the brand was no good, the acquisitions wouldn’t work. So you have to feel confident with more acquisitions, we are going to see an already very strong brand strengthen.

You mention they compete with public listed firms – again this a positive. It shows how much room for growth there is, and there are no major players or companies with a stronghold or moat in the industry. Nearly all of Cardno’s acquisitions are in fact these smaller private firms. The ones who are competing, are losing ground to the consolidators, who are mostly public with access to more capital. In 5-10 years’ time, you have to worry about their ability to compete with the large players. You mention they have higher margins, well what happens when they erode from price pressure from large firms who don’t require that? Anyhow, this is not a margin game, the services are completely different.

Capital raisings? Yip the one of late I did not like. They said it was to put employees on the register which softens the blow. At the end of the day, they have taken that capital and made shareholder returns with it. Even if they pay down debt as that debt was made returns above the capital employed. I do feel they are getting to the size where they can fund most of the growth through free cash flow.

Overall, I’ve gone into this a lot more than I intended to – I don’t hold CDD and aren’t even close to.

Why not? I only take safe safe bets these days. I want to see more of the same - for another year or so to confirm my inklings that this acquisition strategy is going to create this competitive advantage. But you need to follow this company close to see that happen, and dig right into the business combinations note.

[mark100]

Good profit forecast from MYE this afternoon. Probably puts them a little ahead of consensus

[mark100]

You mention they compete with public listed firms – again this a positive. It shows how much room for growth there is, and there are no major players or companies with a stronghold or moat in the industry. Nearly all of Cardno’s acquisitions are in fact these smaller private firms. The ones who are competing, are losing ground to the consolidators, who are mostly public with access to more capital. In 5-10 years’ time, you have to worry about their ability to compete with the large players. You mention they have higher margins, well what happens when they erode from price pressure from large firms who don’t require that? Anyhow, this is not a margin game, the services are completely different.



No, I said they compete with unlisted privately owned companies. As for 'this is not a margin game' - are you dreaming? Margins are the number one game of almost every business, particularly with engineering consultants. When I managed jobs at an engineering consultant, job margin was the number 1 concern (after getting the job done). Everytime I logged in to a job the current profit margin was shown. If it fell below a certain level you had to explain why...

[mamos]

Hi Mark,

Interested in your thoughts why MYE is able to earn a much higher ROE than DSB?

CHeers

[mark100]

Hi mamos,

Looking at DSB vs MYE for FY10 and using average assets and equity values and DSB's normalised NPAT:

MYE:
Revenue / Assets - 214%
ROA - 15%
ROE - 31%

DSB:
Revenue / Assets - 115%
ROE - 7.5%
ROE - 12.5%

MYE appears to be working its asset base around twice as hard as DSB. As for the reason I don't know exactly. Possibly DSB has invested in a lot of equipment and we will see the benefit this year. Until we see DSB's accounts its hard to make that call. MYE also claims to have invested in new equipment last FY.

MYE have told me they don't always have to use their equipment. Sometimes they use the clients equipment. See my post #16 above. If this is not the case for DSB it could explain their lower return on assets.

MYE have already told the market they have a decent result coming. DSB have left the market guessing so far. So it will be interesting to see what they can produce for the interim.

[mark100]

MYE's report ticked all the boxes for me. EPS ahead of forecast, good cash flow, conservative debt, high ROE, strong order book etc etc

[corky]

Mark

Yes very good result from MYE - should have topped up on open.

DSB also good (maybe lower quality) and perhaps offers more short term potential SP gain at higher risk.

Corky

[mark100]

Took a significant amount off the table today at $2.50. MYE has gone from being seriously undervalued to being fairly valued quite quickly which makes it ripe for a pull back at some stage. Probably trading at a bit over 11x FY12 earnings now.

[steve fleming]

Interesting commentary:

“the first half has seen the return to more stable conditions following a period where the sector has acted aggressively to reduce costs across theiroperations. We are confident going into the second half that we will continue to see our businessimprove its financial performance before moving back into growth in FY2015

Our half year results have concluded above guidance and more notably with improving performance building into the end of the half year period. We have continued to maintain an overall steady stateoperation across the period by maintaining existing contracts, renewing contracts and securing newframe work agreements. We are confident that we have moved past the bottom of the downward cycle for MYE.

[mark100]

BMA (BHP Mitsubishi) laid off another 30 in Brisbane last week so some parts of the industry are still going backwards. MYE worth keeping an eye on however