Millennium Services Group Ltd: State, Sector and Services Optionality
Millennium Services Group Ltd
State, sector and services optionality
Millennium Services Group Ltd (ASX:MIL) has delivered an FY21 result in-line with expectations given recent 4C/1H21 commentary/results. To reiterate the highlights include underlying sales growth of 6.4%, underlying gross profit +32% and underlying EBITDA +190% to $11.6m. Net debt ended the year at just $0.3m thanks to JobKeeper, the earnings improvement and a ~$12m release in working capital with days receivables down to ~22 days. FY22 looks to be a year of consolidation, with COVID-related (higher margin), adhoc services expected to slow while the $28m QIC cleaning/security contract will end October 2021, resulting in a $0.5m NPAT hit in FY22 all else equal. The group is finalising a new 3-year growth strategy under new leadership incorporating the appropriate organisational structure. Increasing the integrated service capabilities and diversifying into underweight states (VIC) and sectors (education and government) are likely to be high on the list, and the group has the balance sheet to execute. Current COVID lockdowns do not appear to be materially impacting trading, with 63% of the cleaning business in states/countries without lockdown (WA, QLD, SA and NZ). Valuation remains well supported at current levels with our selected peer average FY21 EV/EBITDA multiple 5.2x against the current MIL multiple of 2.2x. An average peer multiple would see a MIL share price closer to $1.30/share with optionality for new contracts/acquisitions.
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. 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.
3-year growth strategy to reveal where to from here
With the profit improvement program 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 3-year growth strategy which will influence balance sheet use, capital management and the extent of growth on offer in what are very fragmented markets but also markets open to complimentary service offerings. Our numbers only imply modest (~5% of existing sales) contract wins into FY23.
Valuation between $1.30 (relative multiple) and $1.60 (DCF)
As mentioned above a peer group average FY21 EV/EBITDA multiple implies a $1.30/share valuation for MIL, and we see no reason why this business does not deserve average multiples. As a sense check, our DCF valuation sits around $1.60/share, incorporating modest growth and a RFR much higher than the current 10-year bond rate.
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