Millennium Services Group Ltd: The Gross Margin Is Back

Millennium Services Group Ltd (ASX:MIL) has delivered an underlying 1H21 interim result ahead of forecast, with EBITDA of $7.0m against $5.2m forecast and $2.4m in the previous corresponding period (PCP). The beat was at the gross profit ($0.7m) and operating cost ($1.1m) lines with benefits from elevated higher margin ad-hoc work and lower operating costs. The reported gross margin year-on-year increased 220bps on the back of significant investment in systems to better manage employees, together with the continued exit of unprofitable contracts, and is now at a level comparable to peers, and, in our view sustainable. Debt reduction was also greater than expected, with net debt at December 31, 2020 $7.1m against $15m forecast, placing the group in a strong position to win new business and/or explore acquisitions. The core sales base is recovering slowly from COVID- related disruptions, and the group still cites a qualified sales pipeline of $532m over the next 18-months. Such business spans across a range of sectors and promises a more diverse revenue stream medium-term, which is one of management’s strategic priorities. Our current estimates imply a fraction of this pipeline is won. Looking forward we are expecting lower underlying 2H21 NPAT relative to 1H21, but a significant improvement on the PCP, driven by the same drivers as 1H21 (lower costs and higher gross margins) together with lower interest expense. Despite the near-term beat, our medium-term numbers remain relatively unchanged, as to does our DCF at $1.60/share. We are cognisant of rising 10-year bond yields but are comfortable our medium-term numbers are conservative. Our DCF implies FY21 EV/EBITDA of 7.2x.