Millennium Services Group Ltd - Consistent Quarterly Revenues Continue
Millennium Services Group Ltd
Consistent quarterly revenues continue
Millennium Services Group Ltd (ASX:MIL) has released its Q3 FY22 activities report. Revenues for the March quarter were $65.9m (RaaS $64.3m), benefitting from fewer Covid-related disruptions in the contracted business. Revenues were 5% below the PCP due to the loss of the QIC contract ($28m annualised in September 2021) but just $0.2m below Q2 FY22, highlighting the consistency of revenues quarter-to-quarter. MIL ended the quarter with net debt (including trade finance) of $10.5m which included $5.0m in trade finance because of the timing of staff payments over the quarter (an additional fortnights’ pay amounting to $5.6m). Our assessed peer group of people-heavy service businesses has held up well recently and now trades at an average 5.0x EV/EBITDA. MIL continues to trade at a material discount to peers at a forecast 2.3x FY22 EV/EBITDA. The average peer multiple would imply a share price of $1.10/share. With generally long-term three-five-year contracts in place with tier-one players, we see no reason why a multiple closer to the peer average is not achievable.
Business model
MIL is a human services business with a focus on the essential services of cleaning and security, bidding for predominantly long-term contracts that have annual contract adjustments to protect MIL from movements in labour resource costs. Additional volumes over and above those contracted can be gained from ad-hoc services, which represent ~15% of group revenues at a higher average margin. 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 to demonstrate transparency in these important areas (which most large private companies can’t achieve) will be key in this push.
Revenue consistency shines through
Adjusting for the QIC contract loss in September 2021, the quarterly revenues both on a contracted and ad-hoc basis are incredibly consistent quarter-to-quarter despite some Covid-related disruptions. The same should be the case on a year-to-year basis and with at least three-year contracts in place, aids in the profitable management of the business. This is a key advantage MIL has from a business model perspective relative to some of our assessed peers.
Relative EV/EBITDA implies a $1.10 valuation
Our assessed peer group average FY22 EV/EBITDA multiple implies a $1.10/share valuation for MIL (5.0x EV/EBITDA), and we see no reason why this business does not deserve peer- average multiples given average contract length (three-five years), relative working capital intensity and market opportunities. Selected peers include Service Stream (ASX:SSM), GNG Engineering (ASX:GNG), Lycopodium (ASX:LYL), Southern Cross Electrical (ASX:SXE) and Ashley Services (ASX:ASH).
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