Profit up 80%. Revenue up 55%. A strong growth outlook. The annual financial result from mining services business Macmahon (MAH) was one of the better results this reporting season. But the share price is down 20% over the past year as a series of missteps have dented confidence in the company.
The first issue arose at the half-year result in February. An employee bonus scheme meant most of the earnings above the low end of management’s previously guided range was to go to staff. The second came when two directors unexpectedly resigned. The third when the company entered a formal dispute with a client over a large contract.
None of these issues are individually significant and they are being addressed.
The profits for last year were in the middle of the forecast earnings range, after the payment of $3m for the employee bonus scheme. A smaller bonus pool, with more stringent conditions, is in place for this year.
Resigning directors have been replaced with board members who will bring plenty of experience and independence to their roles. The first is Vyril Vella, a former Macmahon director who, despite being a CIMIC (CIM) appointee to the board, joined with the rest of the board in resisting a lowball bid from the construction giant 2017. With seven members and four independent non-executives the board will be able to keep AMNT, Macmahon’s largest shareholder and a major client, in check.
Two other experienced industry participants, both formerly employed by CIMIC subsidiaries, have also joined the board. CEO Mick Finnegan will also step up to the board table. With seven members and four independent non-executives the board will be able to keep AMNT, Macmahon’s largest shareholder and a major client, in check.
The dispute over Newcrest’s Telfer mine also looks to have been put behind the company, though a formal agreement is still to be signed off. It has been problematic and loss-making for years. Macmahon management now expect the project to be cash flow positive after negotiating for increased contract rates. If management didn’t push hard to achieve fair rates the company could have been facing a loss of $25m to $35m over four years.
Mostly forgotten as these corporate issues gripped investor attention is the company’s strong operational performance.
Tropicana and Batu Hijau, Macmahon’s largest contracts, continue to perform well. These reached record volumes, as did new coal and gold projects at Byerwen and Mt Morgans. The company is pushing into underground mining with the purchase of GBF, an underground specialist contractor. It is contracted to perform work worth $4.7bn and has the potential to win $7bn more over the next few years.
Earnings forecasts for this year are well supported by contracted work and a contribution from the GBF acquisition. At the middle of the new guided earnings range, Macmahon shares trade at just eight times this year’s net profit.
Management has had a year of working hard to put out fires. Now, with some issues being resolved, they can finally get on with the job delivering for clients and shareholders.
This is an excerpt from the September 2019 Quarterly Report – you can read the full report here.
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