Millennium Services Group Ltd Secure Balance Sheet, Positioned for Growth

Business model
MIL is essentially a human services business, bidding for predominantly fixed rate contracts, with opportunities for volume gains and adhoc 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.

Cleanup largely complete
It is said that a problem cannot be dealt with until a problem is acknowledged, and in November 2018 widespread legacy issues were acknowledged by a new MIL board and senior management with a view to resolving them. They ranged from a lack of accountability across all layers of the business, an overhead cost structure that was too high, the bidding/winning of tenders at lower than historical gross profit margins, rostering and labour inefficiencies leading to non-recoverable overtime payments and the incorrect application of some EBA allowances. Overlay high debt levels and an earnings hole was created. Fast forward 18-months and overhead costs have been reduced by $7m, contracts have been renewed with all but $20m (5%-6%) in business retained (with most of the business foregone low margin or loss-making), new technology is being employed across the group to improve labour management which incorporates compliance with all modern awards, and mostly importantly debt has been reduced by $20m and facilities refinanced since June 30. Despite COVID (which has been a cashflow benefit but a business disruption), underlying gross margins and EBITDA improved in FY20, with further progress forecast for FY21.

Look to people heavy businesses for peer comparison
Millennium is a people intensive business which marks up labour costs to cover group overheads and achieve a targeted return. This is no different to human services businesses providing accounting, legal, construction or mining services. Key differences between these industries and firms that service them will centre around cyclicality, the level of “value add” or “differentiation” and the base salary from which the service is being marked-up. ASX listed peers we look to include electrical & facilities manager Tempo Australia (ASX:TPP), workforce management group People Infrastructure (ASX:PPE), contractors such as Decmil (ASX: DCG) and engineering services company Logicamms (ASX:LCM).