Millennium Services Group Ltd: Contract Loss More than in the Price
Millennium Services Group Ltd
Contract loss more than in the price
Millennium Services Group Ltd (ASX:MIL) has announced the loss of the QIC cleaning and security contract worth $28m or 10% of FY21 underlying revenue. Management has estimated an annualised $0.5m NPAT impact from the contract loss, which implies a relatively low gross margin contract and the ability to reduce operating costs associated with the contract. We have adjusted our numbers accordingly, resulting in ~10% revenue and NPAT/EPS downgrades over the forecast period. We just recently upgraded sales and earnings by a similar magnitude on a stronger Q4FY21 underlying sales base flowing through the forecast period. Not renewing a low margin 24-year contract/relationship may imply some tightening in competitive pressures in the sector, but we are confident our gross margin assumptions (~14.5%) imply a competitive industry structure. Converting some of the $532m qualified pipeline at group margins now increases in importance but has been impacted by COVID induced decision delays. Valuation remains compelling despite the contract loss, with a forecast FY22 PE of 5.4x, EV/EBITDA 1.5x and free cash flow yield of 35%. The group was effectively debt free at June 30 and is well placed to pursue growth.
Business model
MIL is essentially 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 & 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.
Revenue loss mitigated by low margin and cost offsets
For the $28m revenue loss (~10% of FY21) to translate into just an annualised $0.5m NPAT hit for MIL (~10% of our prior FY22 estimate) implies a low margin contract and the ability to adjust supporting operating costs accordingly. As a result our upgrades put through late July 2021 from a Q4FY21 revenue beat have been offset by the loss of the QIC cleaning and security contract.
100% upside based on FY21 peer EV/EBITDA multiples
Peers for financial comparison with MIL are businesses that rely on human resources to deliver contracted or project work, operate on low gross profit margins (15%-20%), typically deal with larger customers than themselves and are small cap in nature. Stocks with consensus earnings that fit this bill include NWH, MAH, SSM, BSA, GNG and LYL. The average FY21 EV/EBITDA for this group is 4.8x against our assessed EV/EBITDA for MIL of 2.0x. A similar multiple for MIL would imply a share price closer to $1.20, before any re-rate of the peer group.
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