Millennium Services Group Ltd: Acquisition Builds ESG Capabilities
Millennium Services Group Ltd
Acquisition builds ESG capabilities
Millennium Services Group Ltd (ASX:MIL) has announced the acquisition of 49% of Codee Cleaning Services, an indigenous-owned business based in Perth, WA. While not material in EPS terms (we estimate 1.5%-2.0% annualised EPS accretion) it reveals a strategy of partnering with indigenous groups to grow and add value to the business while at the same time respecting the origins of the enterprise. Such moves are likely to be repeated nationally and follow-on from the group’s commitment to meet the highest governance levels in terms of legal, social and ethical responsibilities, which includes the appointment of new Directors with experience in the space. The acquisition cost for 49% is $1.1m with an estimated $2.0m revenue and EBITDA of $0.3m (4.5x). We have incorporated Codee into our numbers as an outside equity interest after tax. The near net cash position places MIL in a strong position to continue making acquisitions in the very fragmented cleaning and security industry, and/or other complimentary sectors. MIL continues to trade at a 50% FY22 EV/EBITDA discount to our selected peer group average (4.8x), which itself is trading at a significant discount to the ASX200. The average peer multiple would imply a share price for MIL of $1.20/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.
Cementing an ESG focus
We have highlighted for some time the group’s increased focus on compliance across Fair Work, the Modern Slavery Act and various Labour Hire regulations, recently employing new Directors with experience in this field, including Darren Perry, who has an extensive background in employment and industrial relations law. The acquisition of businesses like Codee is the next step, partnering with the likes of indigenous groups to grow and add value to the business, but at the same time protect the origins of why such groups were established in the first place.
Valuation between $1.20 (relative multiple) and $1.60 (DCF)
The peer group average FY22 EV/EBITDA multiple implies a $1.20/share valuation for MIL (4.8x EV/EBITDA), and we see no reason why this business does not deserve peer average multiples given average contract length, relative working capital intensity, balance sheet strength and market opportunities. As a sense check, our DCF valuation sits around $1.60/share, incorporating modest medium-term and terminal-growth assumptions.
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