Millennium Services Group Ltd: Resilient Revenues in Lockdown
Millennium Services Group Ltd
Resilient revenues in lockdown
Millennium Services Group Ltd (ASX:MIL) has released its FY22 September quarter activities report incorporating some trading commentary. Revenues for the quarter were $65.6m (RaaS $65m), 2% above Q1FY21 but 5.3% below Q4FY21. Both Q1FY21 and Q1FY22 were impacted by COVID-related lockdowns at shopping malls but considering the extent of the most recent lockdowns, contracted and ad hoc revenues are proving very resilient. Despite lockdowns lifting we expect quarterly revenues for the remainder of FY22 to be down on FY21 due to net contract losses. The loss of the $28m per annum QIC contract has been slightly offset by the $6m per annum Westfield Southland contract (net $22m loss or 8% of FY21 revenue). Operating costs and working capital have and will continue to be a little volatile quarter to quarter. Head office support for the QIC contract will be removed, limiting NPAT damage but will predominantly be seen in 2HFY21. The timing of wage payments can have a massive impact on cash flows quarter to quarter given the size of the workforce (~4,800) and low gross margins, with Q4FY21 net cash from operating activities +$9.9m and Q1FY22 -$4.3m. Despite contact losses we continue to see value in MIL at current share price levels, trading at a forecast 2.5x FY22 EV/EBITDA against a peer average of 4.8x. The average peer multiple would imply a share price 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.
Three-year growth strategy to reveal where to from here
With the profit improvement programme all but complete and a “sustainable” earnings base established, the focus now moves to growth options, particularly in the light of the QIC contract loss. Management is in the final stages of formulating a three-year growth strategy which will influence balance sheet use, capital management and the extent of growth on offer in what are fragmented markets but also markets open to complimentary service offerings. Our numbers imply only modest (~5% of existing sales) contract wins into FY23.
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 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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- Millennium Services Group Ltd: Resilient Revenues in Lockdown25 Oct 2021