Metarock Group Ltd - FY23 Guidance Is Rocking
Metarock Group Ltd
FY23 guidance is rocking
Metarock Group Ltd (ASX:MYE) has reported its H1 FY22 result and provided a revised guidance range for FY22 and first-time guidance for FY23. The H1 FY22 result saw two significant items (Crinum costs of $6.9m and PYBAR transaction costs of $1.1m) and adjusting for these delivered EBITDA of $16.6m, +70% on the depressed H1 FY21 earnings base. Adjusted for a first-time contribution from PYBAR, growth was closer to 35%. The PYBAR contribution was below that implied by acquisition metrics and the result of two problem contracts that are being worked through. FY22 revenue and EBITDA guidance has been downgraded on the back of PYBAR and Crinum delays but still implies growth of 60% and 320% respectively. FY23 guidance implies an average 120% EBITDA uplift on FY22 as the two whole-of-mine contracts (Crinum and Cook) reach full production, and PYBAR secures new contracts while resolving problem contracts. Importantly, this level of revenue and EBITDA should be sustainable for at least six years given the structure of the contracts, and a key reason why we believe the stock deserves a premium rating relative to its peer group. We estimate a FY22 peer EV/EBITA and EV/EBITDA multiple of 6.1x and 3.7x respectively. A blended FY23 multiple for MYE (the first year of WOM delivery) implies a share price of $1.40/share. Our valuation is closer to $1.78/share on the premise that longer-term contracts deserve a premium to the sector average. A sector re-rate offers further upside. Our DCF as a sense check is $2.00/share.
Business model
MYE provides a range of contracted services and equipment hire to major underground metallurgical coal and more recently metalliferous hard rock owner/operators via the acquisition of PYBAR. These services include underground roadway development, conveyor installation, longwall relocation and maintenance, and supply and installation of underground ventilation control devices. Such services require the recruitment of human resources and efficient 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.
Transformational deals not yet evident in reported numbers
The $47m PYBAR acquisition (plus assumed equipment hire leases) has contributed for just two months, the seven-year WOM Crinum contract delayed 20 weeks, and the four-six-year Cook Colliery contract has just been signed, while significant capex/costs have been incurred in readiness for all three. Revised guidance for FY23 provides an insight into the group’s earnings potential and implies EBITDA growth of ~120% on FY22. Importantly, the FY23 earnings levels should be sustainable over the next six years given contract duration and structure. This is key when looking at numbers and resulting valuation multiples.
Valuation of $1.78/share based on peer multiples
Our preferred valuation methodology for MYE is multiple-based given the number of long- listed mining services companies on the ASX. We apply FY22 “top-three” peer multiples to MYE’s FY23 earnings as they are more reflective of the recent WOM contracts and PYBAR acquisition. The result is a blended valuation of $1.78/share and implies multiples of just 4.4x EV/EBITDA and 6.9x EV/EBITDA. We see upside from a sector re-rate off this low base.
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