It has been expected for a long time. If the AFR is to be believed, it isn’t the first bid CIMIC Group has lobbed on the table. But CIMIC’s early 2017 bid for the 80% of Macmahon it doesn’t already own is the first serious attempt to relieve minority shareholders of their holdings.
The Australian quotes us this morning as being “angry” at CIMIC for the bid. Quite the contrary, the bid is excellent news and we are happy it has finally arrived.
Firstly, CIMIC has the right to bid any price they want. They have given all other shareholders a free put option for the next few months. The bid is “unconditional” and can only be withdrawn under very limited circumstances. That means shareholders can observe the next few months, carefully analyse the response from management, all the while maintaining the right to sell their shares to CIMIC for 14.5 cents. It is hard to complain about that.
Secondly, for the past few years we have been pushing the board to do more to realise the value inherent in Macmahon’s business. Defending this bid from CIMIC will force their hands.
They have already stated that they think the bid undervalues the company. Now it is time to prove that the value they (and we) see in the business can be realised. The response to CIMIC’s bid needs to have a clear focus on returning cashflow to shareholders over the next few years. That should include surplus cash on the balance sheet and cash from operations. A public commitment on this can only be good for shareholders.
Fewer words, more action
Finally, Macmahon needs to show it can win profitable contracts and return to being a sustainable business. There has been a lot of talk about pipeline over the past 12 months. There has been some suggestion that CIMIC’s bid is a defensive move to remove a resurgent competitor from the market.
Those words need to turn into action. Unlike small nimble players like MACA Limited, and despite dramatic cost cutting in recent years, Macmahon has the infrastructure and systems of a large mining contractor. It needs something like $500 million per annum of revenue to justify its large-company overheads. If it wants to avoid being gobbled up, it needs to show shareholders some contract wins. Last week’s announcement suggests we should see something in the coming weeks.
Our base case valuation for the company is around $0.20 per share. The company has $0.17 per share of net tangible assets (mostly mining equipment at heavily written down book values). Roughly 30% of that is net cash, and a recently expanded flagship contract at the Tropicana gold mine underpins the rest.
CIMIC’s bid provides some nice downside protection and has spurred the board into action. But patient shareholders are likely to do better and we have added to our holdings since the bid was announced.
*As of close of business Friday 27 January 2017, funds managed by Forager owned 8.63% of Macmahon’s outstanding shares.
General advice only
Forager Funds Management provides general information to help you understand our investment approach. Any financial advice we provide has not considered your personal circumstances and may not be suitable for you.