Millennium Services Group Ltd: Revenues on Track as Lockdowns Ease
Millennium Services Group Ltd
Revenues on track as lockdowns ease
Millennium Services Group Ltd (ASX:MIL) has released its Q2 FY22 activities report. Revenues for the December quarter were $66.2m (RaaS $64.7m), benefitting from higher “ad-hoc” services. Revenues were 6% below the PCP due to the loss of the QIC contract ($28m annualised) but above Q1 FY22 as lockdown impacts eased. While no trading update was given, the adjusted cash-flow numbers look to be in-line with our H1 FY22 PBT estimates. H1 FY22 will include a number of abnormals relating to NZ government grants ($0.8m), the cost of retaining staff during lockdowns ($0.6m), transaction/due diligence costs ($0.8m) and final staff payments relating to the QIC contract loss ($1.2m). MIL ended the half with net debt of $8.5m after the recent Codee acquisition ($1.1m) and the net abnormals, providing ample room for further accretive acquisitions. MIL and our assessed peer group have held up well recently, down an average 4% and 2% respectively since the beginning of November. As a result, MIL continues to trade at a material discount to peers at a forecast 2.5x FY22 EV/EBITDA against a peer average of 4.6x. The average peer multiple would imply a share price of $1.15/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.
Q2FY22 cash flow read-through to H1 FY22 result
Adjusting reported cash flow (-$3.1m) for a number of abnormals (net $1.3m) and the timing of customer payments (working capital - $3.6m) supports our profit before tax (PBT) estimate of $1.7m. Abnormals relate to a $0.8m NZ government grant, offset by transaction and due diligence costs ($0.8m), the cost of not standing down staff during lockdowns ($0.6m) and termination payments relating to the loss of the QIC contract ($1.2m). Net debt ($8.5m) remains low despite these abnormals and the payment for 49% of Codee Cleaning Services ($1.1m).
Valuation between $1.15 (relative multiple) and $1.60 (DCF)
The peer group average FY22 EV/EBITDA multiple implies a $1.15/share valuation for MIL (4.6x 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: Revenues on Track as Lockdowns Ease31 Jan 2022