Millennium Services Group Ltd - Solid Underlying Contract Growth
Millennium Services Group Ltd (ASX:MIL) has released its Q1 FY23 cash flow incorporating updated revenue commentary. Contracts revenue rose 4% despite cycling the last of the QIC contract expiry (underlying growth estimated at ~11%). Ad-hoc revenues were lower as guided and forecast as COVID-related activity declined. Operating cash flow was negative $4.7m, similar to the pcp due to both the timing of collections and the number of fortnightly wage payments in a quarter. For these reasons MIL quarterly cash flow can be volatile but not an area of concern. Net debt excluding trade financing (related to the funding of wage payment timing) ended the quarter at $1.4m. The renegotiation of finance facilities remains well advanced and is key for the resumption in dividend payments. MIL’s share price has performed well since July 2022, up 78% against the selected peer average of 11%. Despite this performance the group continues to trade at a 55% FY22a EV/EBITDA discount to the peer group. A multiple closer to the peer group would imply a share price of $1.20/share.
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 revenue 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.
Debt renegotiation remains a key catalyst
MIL quarterly cash flow numbers can be volatile depending on the timing of collections and the payment of wages. Revenue trends (higher contract/lower ad-hoc) and gross margins (a touch higher than FY22) have been well flagged, so there are few surprises in the September quarter 4C. With net debt at $1.4m (ex-trade finance) the renegotiation of debt facilities and removal of dividend covenants is a key catalyst in coming months. On our estimates a 50% pay-out ratio on FY23 EPS estimates would imply a yield of 12% fully franked.
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 (5.3x 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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