Millennium Services Group Ltd: Q4 Sales Beat & Effectively Zero Net Debt
Millennium Services Group Ltd
Q4 sales beat & effectively zero net debt
Millennium Services Group Ltd (ASX:MIL) has released a quarterly activity report for the June 2021 quarter, with two key beats relative to our current forecasts. First, the company has ended the year in effectively a zero net debt position, albeit aided by payment and collection timings. This, and the effective interest rate on debt, has seen us reduce interest expense assumptions through the forecast period. Second, Q421 revenue came in 14% above our estimates, which were conservative given a COVID-impacted base and continued COVID disruptions. This represents a 3% increase for FY21 and a higher base for forecast years, resulting in a similar increase across the forecast period. Using our current GP% and operating cost assumptions our underlying NPAT/EPS assumptions increase 12%-15% over the FY22-FY24 forecast period as a result of these changes. We will await the finer details of the FY21 results release (expected mid-August) to fine tune our DCF valuation, but highlight that based on our current earnings estimates, MIL is trading on an FY21 PE of ~7.0x and EV/EBITDA of 2.7x. Our assessed peer group trades on an average 4.8x FY21(f) EV/EBITDA, offering 80% upside to the current share price on a multiple-based valuation.
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.
FY21 sales base higher than forecast
Q4FY21 revenues were 14% above our conservative estimates given uncertainty over the COVID-impacted PCP base and any further COVID disruptions in Q4FY21. We have now adjusted our FY21 numbers to reflect this, which has also positively impacted the base for future estimates. Currently, most of our growth forecast for FY22 is a “normalisation” of Q1 sales from $64.3m in Q1FY21 to the ~$69m-$70m reported through Q2-Q4FY21, with any new contract wins offering upside.
80% 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 2.7x. 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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