Millennium Services Group Ltd - Supportive M&A Activity in the Quarter
Millennium Services Group Ltd
Supportive M&A activity in the quarter
Millennium Services Group Ltd (ASX:MIL) has released its Q4 FY22 and FY22 activities report. Q4 FY22 revenues were $62.9m, 4% below forecast due to lower ad-hoc revenues. Contract revenues remained steady between $55m and $56m through each of the four quarters of FY22. Net debt finished the year at ~$4.0m while there was $14.9m in unused credit facilities providing solid growth options. Net cash from operating activities was ~$4m (25% of Mkt cap) while company adjusted (for one-offs and timing) ‘net analytical cashflow’ was closer to $10m (50% of mkt cap). We have taken the opportunity to adjust numbers for 1) higher one-off’s in FY22, 2) lower ad- hoc revenues in Q4 FY22 and into FY23, and 3) lower depreciation. The result is a ~3% reduction in revenues over the forecast period and 5%-7% reduction in NPAT. MIL continues to trade at a material discount to peers at a forecast 1.8x FY22 EV/EBITDA. Valuation has been further supported this quarter by the acquisition of cleaning/facilities management business BIC by Bidvest (JSE:BVT) for $140m or a 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.
Supportive M&A activity through the quarter
Two acquisitions over the last quarter provide further valuation support for MIL given business similarities. 75% of oil and gas personnel provider Linc Personnel was acquired by Ashley Services (ASX:ASH) for 3.4x EBITDA. A similar multiple for MIL would imply a share price of $0.84/share. Commercial cleaning services business BIC was acquired by Bidvest (JSE:BVT) for A$140m. A similar multiple for MIL would imply a share price of $2.11/share.
Relative EV/EBITDA implies a $1.25/share valuation
Our assessed peer group average FY22 EV/EBITDA multiple implies a $1.25/share valuation for MIL (5.2x 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. Selected peers include Service Stream (ASX:SSM), GNG Engineering (ASX:GNG), Lycopodium (ASX:LYL), Southern Cross Electrical (ASX:SXE) and Ashley Services (ASX:ASH). Recent M&A activity further supports these multiples.
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