Metarock Group Ltd - The Risk/Return Equation Continues to Widen
Metarock Group Ltd (ASX:MYE) has released a quarterly activity report which while having a number of moving parts points to a widening risk/return equation (to the return side) in our view as restructuring continues while key contracts are yet to hit the numbers. From a return basis the share price continues to slide, offering further upside on unchanged earnings and multiple assumptions, the potential recoupment of Crinum remediation costs continues to increase (now >$30m, up from $18m), net capex is slowing and below our forecast run rate for FY23, and FY23 guidance is unchanged for now. Risks centre around an inability to recover Crinum costs (we are only assuming 30% of the total), a sale of excess equipment below book value (unlikely given the A$, coal price strength and age of equipment), further ramp-up delays at Cook (already considered in recent guidance) and a counter claim by the Crinum mine owner. The only change to our numbers is a $10m increase in debt relating to additional Crinum costs incurred over the quarter. We continue to apply peer FY22 EV/EBITDA multiples to MYE FY23 and FY24 revised earnings estimates implying a valuation of $0.62/share and $1.25/share respectively. Our DCF, as a sense check, is $1.00/share. PP&E had a book value of ~$110m at June 2022, providing significant NTA/valuation support.
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 and 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 sought to move into mine operations to operate mines in its own right for asset owners with limited underground experience. Such operations are longer- term in nature providing repeatable revenue at higher margins relative to contracting.
Q1 FY23 trading update sees increase in debt due to Crinum
Net debt excluding invoice financing facilities has increased from $60m in June 2022 to $75m in September 2022 as an additional $10m in Crinum remediation costs were incurred. A second tranche payment for the Wilson acquisition added a further $3.3m to debt as forecast. We still expect net debt to finish the year around $53m assuming modest (30%) recovery of Crinum costs and asset sales totalling $25m, together with positive operating cash flow. It should be noted Q1 FY23 includes none of these offsets, likely losses at PYBAR and little contribution from the higher margin Cook contract.
Valuation between $0.62/share (FY23) to $1.25/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 and FY24 earnings as they are more reflective of recent contracts at full production. The result implies a valuation of $0.62/share using FY23 estimates and $1.25/share using FY24. Our DCF as a reference is $1.00/share.
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