Maca Limited (ASX: MLD) is one of Australia’s leading diversified contracting groups, with operations spanning across Australia and internationally. They are essentially a partner to the mining and resources sector, specialising in Mining, Crushing, Civil Construction, Infrastructure, and Mineral Processing activities. Maca is thus incredibly diverse, and they offer a range of services to these industries.
In FY21, Maca has made significant progress on their strategic vision to become a national, full service contractor. This has included a material acquisition, an organisational restructure, continued diversification, and progress on legacy issues. MACA’s exploits in gaining market share was underpinned by the significant tailwinds that were and are continue to be in play for the mining and mining services industry.
MACA has seen improved performance during 2021 in the underlying business operations, again achieving record levels of revenue and work in hand, alongside a positive recovery in our EBITDA and NPAT margins. MACA’s acquisition of the Mining West business significantly enhanced the Company’s scale and diversity in the Mining division by adding four projects.
The strength of Maca lies in its diversity. They offer a range of solutions to these 6 segments that they operate across. Maca’s operating businesses and services include:
A highly efficient Mining company: The group has a proven track record in delivering projects safely, within the timeframe and budget. MACA has become a leading Mining contractor within Australia. Through its Mining arm, MACA is specialised in mining services. It is committed to delivering effective mine to mill solutions via the utilisations of modern equipment and operating techniques. One of the key advantages vis-à-vis its competition is that MACA offers highly experienced project management teams with in-house drill and blast services and a self-owned fleet of high-quality mining plants and equipment. In terms of delivery, MACA’s operation is quite diversified. Hence, the firm can successfully deliver Open Cut Mining Projects across a range of commodities including gold, lead, iron ore, nickel, and diamonds. MACA’s Mining division operates throughout Australia and Internationally.
A complete Crushing and Screening solution: The other key activity MACA’s is involved in is crushing. MACA has also extensive experience as a crushing and screening operator. The company also owns all the equipment and resources for this activity which is in high demand in the mining sector. Hence, MACA provides the plant, equipment, and personnel to Crush and Screen with efficiency. MACA Crushing division offers a host of Crushing and Screening services, using modern well-maintained equipment and the latest technology. Again, what is set ahead of the company, is that it has a solid experience and the personnel to deliver projects to completion on time and on budget.
The Australian Mining efficiency exported abroad: Besides being well-established in Australia, MACA has also a presence in the key geographic location of Brazil. The MACA Mineração currently operates in the Para state of Brazil in South America. The Brazilian division also has robust mining capabilities which are appreciated by the local mining sector. MACA provides locally, total mine management service, mine planning, along with Pre-Strip, Drill and Blast, load and haul, crushing and screening, and mine site rehabilitation.
MACA is leading the civil construction: MACA has successfully delivered civil projects via all types of contract models in both greenfield and brownfield environments. The company through its civil construction branch has a proven ability to deliver safe, innovative, and effective project solutions, often constructed in or adjacent to operating environments demanding strict safety, interface and traffic management processes and effective stakeholder and community liaison. What differentiates MACA from other Civil construction firms is that it operates state-of-the-art technology in Construction Survey and Machine Control to limit material waste, decrease risk around service strikes and increase accuracy.
The market leader in infrastructure and road maintenance: MACA’s infrastructure and maintenance arm is a kind of “mini” vertically integrated road management solution. Hence, MACA’s infrastructure business provides asset management solutions to maintain road networks for state and local governments. This includes activities such as routine maintenance programmes to strategic asset management.
The Resource and Energy sector partner: Overall, MACA is, to say the least, a diversified business. Along with the mining, civil construction and infrastructure sector, the group has also a multi-disciplinary division business. Thus, the MACA Interquip has a proven track record in delivering small to large scale SMP projects, new and refurbished plants, equipment and consumables to the Mineral Processing, Energy and Resource Sectors.
Consistent Growth across Segments
Maca is a one-stop-shop for several mining services that are required in abundance, especially here in Australia. Their revenue model is ‘contract based’, wherein Maca takes complete end-to-end ownership of the task at hand. They work on high profile projects such as BHP’s Mining Area C, a mine that is familiar to investors in Deterra, Fortescue’s Eliwana Project, etc.
Most of Maca’s assets lie in the Mining segment and this is where a majority of their revenues are derived from. Civil and Construction, and the Interquip segments follow suit. All 3 of these segments have been growing quite well in the past 4 to 5 years.
- Mining segment has grown at a CAGR of 15.5% over the past 5 years.
- The Civil & Infrastructure segment has a CAGR of 23.5% since 2017.
- Interquip has been measured since 2018, the segment has a 4 year CAGR of 46.2%
These growth numbers show that Maca has grown very sustainably. In the chart above, we see that since 2018, the Mining and Civil & Construction segments, the two largest contributing segments, have not had a slip up. We can draw a conclusion that Maca has been very successful in both – extending contracts and striking deals for fresh contracts consistently, both of which are extremely important.
Record FY21 Performance
The FY21 underlying financial results were largely in line with market consensus, with revenue of $1.173 billion, EBITDA of $162.1m ($140.4m reported) and NPAT of $38.8m ($20.7m reported). Statutory results included one-off Mining West acquisition costs, Bluff cessation costs and other items considered as one-off in nature, resulting in a statutory Net Profit After Tax of $20.7m.
MACA’s acquisition of the Mining West business, completed in February 2021, has made a significant contribution to the strategic development of the Company, doubling the size of our Mining division. This acquisition has provided MACA with additional geographical spread, increased scale, capability, and commodity diversification for our Mining Business. MACA’s statutory earnings would have been higher had it not been for one-off costs relating to the Mining West acquisition ($12.4m of costs primarily relating to stamp duty, partially offset by a $3.7m net gain on business combination), in addition to costs of $8.0m relating to the cessation of the Bluff mining project and other one-off costs relating to MACA’s discontinued Brazilian operations.
At the Bluff mining project, operations ceased in FY21 due to the client, Carabella Resources, entering voluntary administration. MACA appointed receivers and subsequently mined coal in order to partially recover outstanding receivables. MACA is currently running a sales process for the Carabella assets to recover outstanding monies, with proceeds expected to be in line with carrying values.
MACA continues to maintain a position of strong liquidity, with operating cash flows of $118.8m in FY21, up from $116.6m in FY20 and with strong operating cash flows in the second half of the year. The net debt was $180.2m on 30 June 2021, which includes $122.3m of cash. This follows significant capital investment into plant and equipment in the year of $146.7m associated primarily with new projects, being Capricorn Karlawinda, Atlas Sanjiv Ridge, Fenix Iron Ridge and Emerald Okvau.
MACA declared a final dividend of $0.025 a share, taking the full year dividend to $0.05 a share. This represents a fully franked dividend yield of 7.46%
In November 2020, MACA farewelled Mr Andrew Edwards as Non-Executive Chairman of the MACA Board since listing in 2010, and during the year, the company added Sandra Dodds and Nick Marinelli as Non-executive Directors, who both bring a broad range of experience to the MACA Board, having extensive operational and management experience across the Australian infrastructure sectors.
Mining Segment Booms – Underpins FY21 Performance
Operational activities have grown significantly in mining, with MACA continuing its contract mining operations for Regis Resources at the Duketon South and Duketon North operations, with Ramelius Resources at the Mount Magnet, Edna May and Tampia projects, with Pilbara Minerals at the Pilgangoora lithium project, FQM Australia Nickel Pty Ltd at the Ravensthorpe nickel project, and for three new projects commencing in FY21 being Capricorn Karlawinda, Fenix Iron Ridge and Atlas Sanjiv Ridge.
MACA has welcomed four new projects following the acquisition of the Mining West business, for Fortescue Metals Group at the Eliwana project, Karara Mining at the Karara project, Gruyere JV (Gold Fields and Gold Road) at the Gruyere project and Sino Iron at the Cape Preston project (which was subsequently extended for a further three years). Operations ceased for Wiluna Mining Corporation at the Matilda project and for Carabella Resources on the Bluff PCI coal project (due to client voluntary administration).
Internationally, MACA continues to provide mining services at the Okvau Gold Project in Cambodia, which mobilised and commenced operations in FY21. MACA has ceased all Brazil operations and is currently winding up its in-country operations. Given the discontinued operations, repatriation of MACA’s Brazil fleet and inventory to Australia and administrative costs resulted in $2.9m of costs.
The average tenure remaining across MACA’s 15 current mining projects is 37 months. A snapshot of all the tenures in the mining segment can be seen in the picture below.
Crushing Segment Crushes previous results
MACA continued to deliver on its crushing contracts for BHP Iron Ore during the year, which included a contract to crush blast-hole stemming material across its Western Australian Iron Ore operations, a contract to crush and screen up to 12Mtpa at the Mining Area C operation, and a contract to crush and screen up to 5Mtpa at the Eastern Ridge operations. Additionally, MACA performed crushing activities for Altas Iron at their Mt Webber operations which ceased in June 2021, for Fortescue Metals Group at their Iron Bridge and Eliwana operations for stemming material, and minor projects for Regis Resources and other gold producers.
Civil & Infrastructure is backed by Government Spending & Industry Tailwinds
The Civil & Infrastructure business is an important element to MACA’s growth and diversification strategy and will benefit from the increased scale of the combined MACA business. MACA’s recent upgrade to R4/B3 conditional under the National Prequalification Scheme has enabled MACA to participate in and pursue larger road and bridge projects in capital cities for various road agencies around the country.
During FY21 the Civil division completed its work package in relation to the Karratha / Tom Price Road for Main Roads Western Australia, and also completed a number of works packages for Fortescue Metals Group Ltd including general earthworks, camp expansion, construction of a 26km mine access road, construction of the explosive facility and further road upgrades. MACA also completed work for Atlas Iron on the Sanjiv Ridge haul road. In FY21, the South West Gateway Alliance (of which MACA is a 10% participant) was awarded the Bunbury Outer Ring Road, which is contemplated as a $852 million project to construct a 27-kilometre, four-lane, high-standard road from Forrest Highway near Australind to Bussell Highway, south of Bunbury.
In Victoria the business has underperformed which has largely resulted from the impact of Covid19. The business has recently been restructured and refocused on core skills. Positively, MACA was selected by Major Road Projects Victoria to undertake the Golf Links Road upgrade in Langwarrin South along with a number of minor works contracts with VicRoads and local Victorian shires.
In Western Australia, MACA continues to provide the Kimberley region road and asset maintenance contract for Main Roads WA, which MACA was delighted to extend for a further five years during FY21. In Victoria, MACA provided road and asset maintenance services to VicRoads in the Western Region, in addition to providing maintenance services to Local Government.
The picture below shows the tenures of all three of the remaining business segments of MACA.
Interquip Pipeline bolstered
MACA Interquip was awarded the EPC contract for the Red 5 King of the Hills gold project in FY21, encompassing the KOTH processing facility, equipping of the bore fields, high voltage power distribution, workshop, warehouse, and bulk earthworks. This is in addition to the supply contract previously awarded to MACA Interquip for the SAG Mill and gyratory crusher. MACA Interquip also conducted a number of minor projects throughout FY21, including support to Capricorn at the Karlawinda Gold project (including fabrication, steelwork, and personnel), in addition to various minor works packages for BHP, Saracen, Wiluna Mining Corporation, Tropicana JV, Norton Gold and others.
The story during FY21 for MACA is that of bolstering their pipeline across all business segments. In fact, MACA’s work in hand has increased substantially over the previous two years, from $1.3bn in August 2019 to $3.1b as of August 2021.
Robust Outlook and Relatively Cheap Valuations
The improved performance of MACA’s enlarged Mining Division is expected to be maintained in the coming year as the renewed focus on operational performance continues to deliver results. Strong commodity prices, particularly in gold and iron ore, continue to generate new opportunities that will support further growth. The Mining Division enters FY22 with about $1.2bn of secured work in hand and MACA remains well positioned to add to its record order book. Notwithstanding the strong commodity and sector outlook for Mining, MACA expects the labour market to remain tight as COVID-19 restrictions continue to impact on the sector’s ability to source candidates domestically and locally.
The Civil and Infrastructure businesses benefited from increased activity in the development of new resource projects in FY21 which is expected to continue into FY22. Whilst Victoria continues to remain challenging due to the impacts and restrictions of COVID19, the division remains well positioned. MACA Interquip entered FY21 with $55m of work in hand and has recently received a $37m letter of intent from Norton Goldfields in relation to the Binduli North Heap Leach project.
Recent organisational changes have added management capability and streamlined reporting processes consistent with MACA’s growing business. These changes are expected to provide an increased focus on business opportunities together with optimising operational delivery. Improvements to metallurgical coal prices have enabled significant progress of the recovery of monies owed to MACA by Carabella, with the sales process for assets held as security progressing, and sales proceeds are expected to cover the carrying value of outstanding receivables. Any sales proceeds from the Carabella assets will have a positive impact on MACA’s cash flows in FY22.
MACA’s work in hand has increased substantially over the previous two years, from $1.3bn in August 2019 to $3.1bn in August 2021. Our pipeline of organic growth opportunities of $11bn across the Mining, Civil & Infrastructure and Interquip divisions, of which $3.7bn relate to mining opportunities with existing clients, is expected to deliver material opportunities to MACA, some of which are anticipated to commence in FY22.
With the tailwinds in the business, revenues in FY21 expanded by 47% and in FY22, our analysis points towards a 22% increase as the mining sector is expected to operate at full capacity – this means that mining services such as MACA will be in high demand. With international travel now within sight, the labour market should ease, more so in the latter half of 2022 – resulting in MACA benefiting from increased margins. The snowball effect from an increase in new contracts, extension of existing contracts, and easing labour market will result in improved EBITDA margins of around 14% in FY22 and FY23. Of course, this level of activity does eventually slow down in the mining sector, however, the robust pipeline of over $3 billion does reinsure the revenues and earnings.
So far, we have discussed just how strong MACA has been performing operationally and financially in the past few years, the robust outlook for the industry that continues to drive their pipeline and work in hand, the handsome dividends, and of course the expected revenues and earnings for the next couple of years. In addition to this bullish outlook, the valuation multiples of MACA make it a great proposition for long-term investors.
Based on our estimates of revenues and earnings, MACA shares are trading at a mere 4.48x FY22 P/E and just 1.98x FY22 EV/EBITDA. We are of the opinion that the market is undervaluing MACA, and it is thus a fantastic opportunity.
MACA is a well-diversified mining services company that has been performing exceptionally well, both, operationally and financially. The firm has consistently grown its revenues and earnings and given the robust outlook; it is expected to continue growing. MACA already comes with $3.1 billion of work in hand and their pipeline across all their business segments is strong. Add to this consistent dividends and a mere 4.48x P/E, we think this is a fantastic opportunity for long-term investors. We issue a “Buy” recommendation on MACA.