Millennium Services Group Ltd - A Stock for the Times
Millennium Services Group Ltd
A stock for the times
Millennium Services Group Ltd (ASX:MIL) has reported H1 FY22 adjusted EBITDA of $6.6m (-4.3% on the PCP) and NPAT of $2.7m (+8% on the PCP and driven by lower interest expense) on a sales decline of 2% due to the loss of the QIC contract. MIL continues to see elevated levels of higher margin “ad- hoc” revenues (now 16% of total) which is driving management’s estimate of underlying revenues growth of 3.7% for the period. Reported numbers include a range of corporate and COVID-19-related one-off’s which we have treated as such. Tender activity has been subdued during COVID-19 but there appears to be signs of life with management highlighting $70m in contracts currently at tender. Some wins on this front are key for MIL near-term, as is a resumption in dividend payments currently constrained by banking covenants. MIL continues to trade at a material discount to peers at a forecast 2.5x FY22 EV/EBITDA against a peer average of 4.6x despite 80% of forecast revenues expected to come from existing three–five year contracts. The average peer multiple would imply a share price of $1.15/share.
Business model
MIL is a human services business, bidding for predominantly fixed-rate contracts with opportunities for volume gains and ad-hoc services, across the essential services of cleaning and security for durations of three-five years with large corporates. Satisfying contractual obligations utilising a vast workforce and procuring consumables for the jobs within the contracted price is 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 keys in this push.
Adjusted numbers are key to value recognition
Reported numbers over the past two years have been positively (mainly government grants) and negatively (corporate costs, redundancies, customer support, staff top-ups) impacted by a number of “one-off’s”. Our numbers adjust for these, and the result reveals solid underlying earnings which are holding despite a significant contract loss. Our estimated underlying EBITDA of $11.0m for FY22 implies just 2.5x EV/EBITDA.
Valuation between $1.15 (relative multiple) and $1.52 (DCF)
The peer group average FY22 EV/EBITDA multiple implies a $1.15/share valuation for MIL (4.6x EV/EBITDA), and we see no reason why this business does not deserve peer-average multiples given average contract length, relative working capital intensity and market opportunities. As a sense check, our DCF valuation sits around $1.52/share, down from $1.60/share due to lower medium-term growth assumptions, with no acquisitions assumed.
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