Contract Loss More than in the Price

Millennium Services Group Ltd (ASX:MIL) has announced the loss of the QIC cleaning and security contract worth $28m or 10% of FY21 underlying revenue. Management has estimated an annualised $0.5m NPAT impact from the contract loss, which implies a relatively low gross margin contract and the ability to reduce operating costs associated with the contract. We have adjusted our numbers accordingly, resulting in ~10% revenue and NPAT/EPS downgrades over the forecast period. We just recently upgraded sales and earnings by a similar magnitude on a stronger Q4FY21 underlying sales base flowing through the forecast period. Not renewing a low margin 24-year contract/relationship may imply some tightening in competitive pressures in the sector, but we are confident our gross margin assumptions (~14.5%) imply a competitive industry structure. Converting some of the $532m qualified pipeline at group margins now increases in importance but has been impacted by COVID induced decision delays. Valuation remains compelling despite the contract loss, with a forecast FY22 PE of 5.4x, EV/EBITDA 1.5x and free cash flow yield of 35%. The group was effectively debt free at June 30 and is well placed to pursue growth.