Mastermyne Group Ltd: New Contract(S) A Step Change in Earnings & Rating
Mastermyne Group Ltd
New contract(s) a step change in earnings & rating
Mastermyne Group Ltd (ASX:MYE) is the leading specialist provider of critical underground Metallurgical Coal mining services in Australia, employing over 1,150 people at December 2020 and representing 95%+ of revenue. FY21 was the first down revenue/earnings year since FY16 with COVID-related shutdowns causing the biggest decline in Metallurgical Coal demand (used for steel making) and exports since at least 1971. Fast forward 8-months and demand is recovering, prices are 100% higher than the December 2020 lows and a number of “care & maintenance” mines are being re-evaluated. The recently announced $600m+ Whole of Mine (WOM) Gregory Crinum contract for MYE is just one example, while MYE is also doing early work at the Cook Colliery (QCoal) and Dysart East. These contracts are gamer changers for MYE offering 6- to 7-year revenue visibility, a doubling in the order book, client diversity and improved margins. Overlaying this contract outlook is a potential “re-rating” of the Australian small- to mid-cap mining services sector, with our peer group currently priced at just 4.4x FY21 EV/EBITDA and 7.8x EV/EBIT despite CAGR sales growth of 30%, EBITDA growth of 31%, EBIT growth of 49% and a reduction in debt/EBITDA from 1.0x to 0.6x between FY16 and FY21. Our analysis suggests MYE deserves a premium to this peer group, promising a re-rate on higher earnings, the ultimate share price driver.
Business model
MYE provides a range of contracted services and equipment hire to major underground Metallurgical coal owner/operators. These services include underground roadway development, conveyor installation, longwall relocation & maintenance and supply and installation of underground ventilation control devices. Such services require the recruitment of human resources and efficiency management of both human resources and equipment for hire. The business charges a margin on top of the cost of labour/equipment to derive revenue and earnings.
New contract(s) and cycle set-up growth for FY22 and FY23
FY21 was the first down revenue/earnings year for MYE since FY16 as COVID-related industrial shutdowns impacted the demand for steel and therefore Metallurgical Coal. Off this reduced base, MYE is poised to deliver strong growth into FY22 and beyond, with much improved Metallurgical Coal prices driving new mining activity. The Crinum and QCoal WOM contracts will add ~$70m revenue in FY22 (+30% on FY21) and ~$150m in FY23 (+65%) and are key drivers of FY22 earnings guidance. These contracts are game changers for MYE in terms of order book, revenue visibility, client diversity and margins.
Valuation of $2.25/share based on peer multiples
Given the number of quality and long-listed small to mid-cap “mining services” listed peers, our preferred valuation methodology for MYE is multiple-based. We have used a (7) variable matrix to assess appropriate relative multiples for MYE and apply the average of our highest rated peers to MYE’s FY23 earnings as they are more reflective of the recent WOM contracts. The result is a blended valuation of $2.25/share which represents just 4.6x EV/EBITDA and 7.8x EV/EBIT. A sector re-rate adds upside to this valuation.
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- Mastermyne Group Ltd: New Contract(S) A Step Change in Earnings & Rating03 Sep 2021