Millennium Services Group Ltd - Significant Optionality in FY23
Millennium Services Group Ltd
Significant optionality in FY23
Millennium Services Group Ltd (ASX:MIL) has released its FY22 results and some outlook comments. Revenues have already been reported, down 4.8% to $260.6m, a solid result considering lockdowns across its core shopping mall space. Adjusted EBITDA was in-line with forecast and 4.5% below FY21 on the back of lower revenues. Adjusted NPAT of $3.8m represents a PER of ~4.0x. Looking forward MIL has guided to a higher GP% in FY23 and a target of 8%-10% organic ‘contracted’ revenues growth. Our numbers currently reflect this. MIL’s banking facilities expire in October 2022, and with shareholder funds now positive and net debt just $4m, we expect this to pave the way for the resumption of dividends, last paid in FY17, and more optionality for industry consolidation. MIL continues to trade at a material discount to peers at a forecast 1.8x FY22 EV/EBITDA. Valuation has been further supported by the acquisition of cleaning/facilities management business BIC by Bidvest (JSE:BVT) for $140m or an estimated forecast 8.8x FY22 EBITDA.
Business model
MIL is a human services business with a focus on the essential services of cleaning and security, bidding for predominantly long-term contracts that have annual contract adjustments to protect MIL from movements in labour resource costs. Additional volumes over and above those contracted can be gained from ad-hoc services, which represent ~15% of group revenues at a higher average margin. 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 to demonstrate transparency in these important areas (which most large private companies can’t achieve), will be keys in this push.
Significant optionality in FY23
A strong balance sheet, 97% of FY22 revenues under contract in FY23 (and 81% in FY24) and banking facilities up for renegotiation in October 2022 provides MIL with significant optionality around organic growth, acquisitions and the resumption of dividends (currently not permitted under existing banking covenants). Any progress on the above is likely to narrow the current valuation gap between MIL and the peer group.
Relative EV/EBITDA implies a $1.20 valuation
Our assessed peer group average FY22 EV/EBITDA multiple implies a $1.20/share valuation for MIL (5.4x EV/EBITDA), and we see no reason why this business does not deserve multiples closer to the peer average given average contract length (three-five years), relative working capital intensity and market opportunities. Recent M&A activity would imply a valuation of $0.84/share based on the (ASX:ASH) purchase of Linc Personnel, and $2.14/share based on the (JSE:BVT) acquisition of BIC. To sense check, our DCF valuation is $1.15/share.
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