Metarock Group Ltd - Guidance Hasn’t Changed but the Share Price Has
Metarock Group Ltd
Guidance hasn’t changed but the share price has
Metarock Group Ltd (ASX:MYE) has provided a trading update which essentially reaffirms its solid guidance for FY22 and rocking guidance for FY23. Investors should be heartened with the coal contracting division running at “full run rate across all contracts”, ground consolidation business Wilson Mining “delivering the strongest performance since the business was acquired”, the Cook Colliery contract progressing to schedule, a “material progression” for the Crinum mine project “on schedule for Q1 FY23” first production, and “stronger operational performance in March” for the recently acquired PYBAR hard rock business. Such issues underpin the revised FY22 and new FY23 guidance provided with the interim result in February. Since then, and despite the above, the MYE share price is down 25% (most likely a reaction to a contractor fatality at an Anglo mine) and now offers outstanding value relative to peers based on FY23 estimates. We estimate a FY22 peer EV/EBITA and EV/EBITDA multiple of 5.9x and 3.6x respectively. A blended FY23 multiple for MYE [the first year of the two whole-of- mine (WOM) contracts] implies a share price of $1.25/share. Our valuation is closer to $1.40/share on the premise that very long-term/higher margin Mine Operations contracts deserve a premium to the sector average. Should commodity prices experience sustained strength than a sector re-rate offers further upside.
Business model
MYE provides a range of contracted services and equipment hire to major underground metallurgical coal operators (roadway development, conveyor installation, longwall relocation and maintenance, supply & installation of underground ventilation control devices) and metalliferous hard rock operators (mine development, raise boring, shotcreting, cable bolting and production drilling) via the acquisition of PYBAR. More recently the group has moved into Mine Operations via the Crinum and Cook contracts, operating mines in their own right for asset owners with limited underground experience. Such operations are longer-term in nature providing repeatable revenues at higher margins relative to contracting.
Transformational deals evident in FY23 as guidance suggests
The $47m PYBAR acquisition (plus assumed equipment hire leases) has experienced some early teething issues but now looks to be on-track with new contracts adding leverage to FY23. Both Mine Operations contracts (Crinum and Cook) are on-track for first production in Q1 FY23 following significant capex incurred during FY22, promising strong revenues at higher margins due to their direct cost structure (direct costs reimbursement + margin). FY23 guidance 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.
Valuation of $1.40/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 contracts and PYBAR acquisition. The result is a blended valuation of $1.40/share and implies multiples of just 3.9x EV/EBITDA and 6.1x EV/EBITA. We see upside from a sector re-rate off this low base.
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- Metarock Group Ltd - Guidance Hasn’t Changed but the Share Price Has29 Apr 2022