Metarock Group Ltd - Slight Pause as Balance Sheet Is Right Sized
Metarock Group Ltd
Slight pause as balance sheet is right sized
Metarock Group Ltd (ASX:MYE) has delivered revenues and adjusted EBITDA within its guidance range for FY22, but Crinum remediation costs were well above forecast at ~$18.5m, while recently acquired PYBAR recorded an EBITA loss of $3.7m which was well below initial forecasts. This cost coupled with the capex required to restart two Mine Operations (Crinum and Cook) have forced a consolidation in growth plans to right the balance sheet. Crinum production has been delayed 12-months and Cook 6-months as a result, while a relook at capital allocation and the business model should result in at least ~$20m of excess equipment sales and lower ongoing capex. FY23 revenue guidance as a result has declined from $700m-$750m to $600m-$650m, and EBITDA from $80m-$95m to $50m-$55m. Importantly the previous guidance range is expected to hold true in FY24 when both Mine Operation sites are expected to be at full production. We have made extensive estimate changes across revenues, EBITDA, depreciation, and capex. Our new estimates still see MYE (FY23) trading at a 35% discount to the adjusted EV/EBITDA peer group (FY22) and material (66%) discount using forecast FY24 metrics (vs FY22), the first full year of Mine Operations. The recent MLD takeover metrics add valuation support for MYE, with a similar EV/EBITDA multiple implying $0.80/share for MYE. Our DCF valuation remains well above the current share price at $1.55/share despite an increased beta assumption.
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.
Reducing the number of balls in the air
The combination of the PYBAR acquisition, the gearing up for two sizable Mine Operation contracts, two fatalities at separate sites and sector headwinds including wet weather, a tight labour market and higher consumable/capital costs has seen MYE slow growth ambitions to right size the balance sheet and consolidate operations. The combination of Crinum cost recovery and a lighter capital model could reduce debt by at least $30m, while the delay of Crinum by 12-months better spreads the capital load across FY22-FY24.
Valuation between $0.95/share (FY23) to $2.00/share (FY24)
Our preferred valuation methodology for MYE is multiple-based given the number of long- listed mining services companies on the ASX. We apply FY22 peer adjusted EV/EBITDA multiples to MYE’s FY23 & FY24 earnings as they are more reflective of recent contracts. The result implies a valuation of $0.95/share using FY23 estimates and $2.00/share using FY24. The recent MLD takeover offer supports MYE metrics implying an FY23 valuation of $0.80/share, while our DCF is $1.55/share, incorporating stable Mine Operations earnings into FY28.
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- Metarock Group Ltd - Slight Pause as Balance Sheet Is Right Sized13 Sep 2022