Millennium Services Group Ltd (ASX:MIL) is a market leading provider of cleaning & security services, predominantly to tier-1 property trusts and retailers (~75% of revenue in FY20). The business employs over 5,000 people and it is the coordination and utilisation of these people across the groups contracted facilities that determines group profitability. Between FY16 and FY18 the fundamentals of people management slipped, resulting in labour inefficiencies, poor tendering practices, a bulging cost structure and higher debt via an acquisition that MIL paid too much for. In November 2018 these problems were acknowledged, and new Board and management installed to fix them. Fast forward 18-months and significant progress has been made, albeit impacted by COVID. Debt has been refinanced and $20m repaid this year, an $11m profit improvement program implemented and largely complete and ~70% of the workforce migrated to new rostering technology. The entire workforce has been moved to modern award wages and compliance and disclosure (including financial) has improved markedly. This restructure coincides with recent IBISWorld cleaning sector forecasts for FY22-FY26 of 3.6% CAGR growth (compared to CAGR -0.5% between FY17-FY21) and combined with a company focus on diversifying into new markets such as commercial, Government, education and aged care, MIL is well positioned for medium-term revenue growth. Gross margins provide the most upside for the group, with the 12.1% achieved in FY20 well below historical (~17%) and targeted (~14%) levels. An analysis of peers suggests the 14% targeted range is well within range and can be achieved with minimal addition to operating costs.
Business model
MIL is essentially a human services business, bidding for predominantly fixed rate contracts with opportunities for volume gains and adhoc services, across the essential services of cleaning & security for durations of 3-5 years with large corporates. Satisfying contractual obligations utilising a vast workforce and procuring consumables for the jobs within the contacted price is the key to profitability. Historically focusing on cleaning and security services within major shopping centres, MIL is looking to de-risk the retail exposure by moving into new sectors including Aviation, Aged care, Education and Government. An increased focus on compliance (Fair Work, Modern Slavery Act and Labour Hire regulations) and utilising the ASX listed nature of the business will be key prongs in this push.
Clean numbers likely to surprise in 2H FY21
Recent reported MIL results have been impacted by COVID disruptions and related JobKeeper payments, and this will also be the case in 1H21. That said company disclosures have allowed an assessment of the underlying progress evident in FY20. 2H21 results are expected to be clean and cycling COVID related disruptions almost 3-years into a turnaround are likely to surprise, providing near-term share price inflection.
Valuation of $1.60/share or $88m enterprise value
Using 5-years of explicit forecasts, modest medium-term growth (3.0%), modest terminal growth (2.2%) and a 10% WACC we value MIL using a DCF of $1.60/share, which implies metrics similar to the FY16 IPO. There is upside using a lower discount rate given the contracted nature of revenues as and when forecast numbers are delivered.
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