A Value Investing Blog

Posted on 03 Mar 2017 by Steve Johnson

Final Week in CIMIC vs Macmahon

Final Week in CIMIC vs Macmahon


Construction giant CIMIC (CIM) has fired its final bazooka in its attempt to gain control over mining contractor Macmahon (MAH). Yesterday it declared that it won’t be extending the bid beyond 9 March and it won’t be raising the price above $0.145.

I’ve received a number of queries from fellow Macmahon shareholders about events over the past few weeks so. With the deadline now locked down, I’ll lay some thoughts out for investors to consider.

We weren’t particularly impressed with CIMIC’s $0.145 bid to start with. They will get no argument from us about Macmahon’s woeful historical performance. The losses being generated at its newish Telfer contract are completely unacceptable and the company hasn’t, until now, been winning enough new work to justify its overheads.

But we don’t value businesses based on the past. We value them based on the future. Macmahon has a platform and a number of core contracts that offer the potential for much higher future profits. And the current management team looks more likely to capitalise on that potential.

Start with the existing business. The independent expert’s report has them pencilled in for $30m-$35m earnings before interest and tax (EBIT) in the 2018 financial year. Most of you probably know my view of the worth of these “experts” but the calculation here doesn’t suggest any pie-in-the-sky assumptions. Stop losing money at Telfer and they will be most of the way there (if they can’t fix the problems on this contract soon, my view is they should find a way to walk). My personal expectation is for management to exceed this number in 2018. That alone would make the $0.145 bid from CIMIC look inadequate.

The recently announced deal with Indonesian mine owner AMNT, however, is a game changer for my valuation.

Friends with benefits

AMNT and Macmahon have agreed terms on a deal that involves getting the contract to mine the giant Batu Hijau copper and gold mine in Indonesia. In exchange for roughly US$150m worth of mining equipment, AMNT would be issued shares in Macmahon that could result in AMNT owning something like 44% of Macmahon (the exact number will depend on the final value of the equipment).

The deal would bring two main benefits to Macmahon’s non-CIMIC shareholders. Firstly, it would more than double the company’s revenue.

I’ve said on a number of prior occasions that Macmahon is too small. The company generated more than $1.3bn of revenue in 2009 (compared with less than $400m this financial year). Despite cost cutting, it still has the corporate overheads of a large company. The contract to mine Batu Hijau Indonesia would lift total revenue back to near $1bn in 2018 and give Macmahon the scale it needs. There are a few other significant contracts in the pipeline and Batu Hijau could grow. I wouldn’t put it in a base case, but Macmahon could be eclipsing 2009’s revenue number in a few years’ time.

Using $1bn of revenue and 6% margins (the low end of industry standards), the company should be generating $60m of EBIT. Accounting for the new shares issued to AMNT, today’s implied EV/EBIT ratio of less than 5 times looks attractive with plenty of potential upside.

A new controlling shareholder

Secondly, it would dilute CIMIC’s stake to less than 15% (based on their current 23% stake in Macmahon).

CIMIC will rightly point out the risks of bringing in a new shareholder with an effective controlling stake in Macmahon. However AMNT only wants to appoint two board members, they bring a very large contract with them and their participation potentially opens up more contracts in South-East Asia.

CIMIC, currently the largest shareholder, has stated an intention to replace the entire board, delist the company from the ASX and, if they achieve their aims, it will trigger a change of control clause in Macmahon’s largest existing contract at Tropicana. We obviously need to see the details, but I’m feeling quite good about our new potential friends.

The next five days of trading are crucial. If CIMIC can increase its stake to something like 30%, it will be hard to stop them scuppering the AMNT deal. They are not making any progress at the moment and the current market price is above the bid price. I hope and will be trying to ensure that it stays that way.

Final Week in CIMIC vs Macmahon
Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon  Final Week in CIMIC vs Macmahon

11 thoughts on “Final Week in CIMIC vs Macmahon

  1. Yes to everything you have said however I have three main concerns:-

    1. Passing effective control to a single shareholder. The fact that the Indonesians currently only want 2 Board seats does not give you a window to the future. Giving up control is a huge ask…and potential future risk
    2. The pricing/condition/valuation on what is effectively an equipment for equity swap with of course the postulated contract carrot.
    3.Jurisdictional risk & the ability to enforce contact conditions/warranties/guarantees in Indonesia. This is a massive concern where many prior Australian companies have come unstuck. Intrepid Mines is one that comes immediately to mind where an Australian explorer sank hundreds of millions of dollars into an exploration find that ultimately proved to be a Tier 1 resource and then to be relieved of its ownership through a court & political system steeped in corruption. History has not been kind to Australian minnow companies that come up against the power of Indonesia’s business families.

  2. Is there anything stopping CIMIC from coming back on March 10th with a higher (but expectedly inadequate) offer to try to secure +30% and keep agitating?

    • My understanding is the corps act prohibits you doing this. Not sure that the amount of time is specified but the general view is you need to wait at least 6 months. Otherwise no one would ever raise their bid and pay everyone a higher price … you would take what you can get and then launch a new one.

      • So then the next question is: can CIMIC freely buy more shares on market without having to make an offer for all shares (as they are over 20%) once this bid lapses?
        If they can buy after the 9th how aggressive could they be?

        • Hi Spencer. Reiterating once again that I am not an M&A lawyer so please get your own advice on this, but my understanding is that the creep provisions apply to any shares acquired in the previous six months, including under a takeover offer. Given they have acquired more than 3% recently, they would have to wait six months before being able to buy on market.

  3. I don’t disagree with yr reasoning, however I bought into MAH last yr (13c) because I saw an undervalued stock with a CEO ( prior one) that had a plan forward. Nothing I have since gives me reason to stay for the medium & long term. I got out at 17c this week. I’ll keep watching but CIMIC’S decision this week has reinforced my decision.

  4. Steve
    Thanks for the update. I have worked in Indonesia on and off for over 10 years and dealt with many construction/mining companies there, including managing multi million dollar construction contracts. The one thing I can say, with some experience, is that no one ever makes money working with Indonesian partners.

  5. I believe that you’ve failed to properly read between the lines of CIMIC’s sixth bidder’s statement.

    All CIMIC have essentially done is restate what they are legally locked into (i.e., not increasing the value of their bid) and what they would need to do if they wanted to actually slug this out and get control of MAH (i.e., let this bid lapse ASAP (being 9 March) with as many acceptances as possible (by saying scary things that depress the SP into their bid price) at the closing date and then launch a NEW bid).

    If you reread what they have said, you’ll find that nowhere do they rule out launching another bid after 9 March.

    I was surprised that the market was fooled by the fighting words and bright colours of CIMIC’s most recent announcements, when in substance they had said nothing new, but I’m even more surprised that you’ve bought it as well.

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