MDM Engineering Group

Transcription

1 Update 16 December 2011 MDM Engineering Group Price 96.5p Market Cap 36m Year End Revenue (US$m) PBT* (US$m) EPS* (c) DPS (c) P/E (x) Yield (%) Share price graph 03/ / (2.3) (3.6) 3.5 N/A /12e /13e Note: *PBT and EPS are normalised and fully diluted, excluding intangible amortisation and exceptional items. $1.5622/. Investment summary: Interim dividend increase MDM Engineering Group s (MDME) strong results for the six months ended 30 September 2011 includes a fivefold increase in interim dividend, pointing to a prospective yield of 4.7%. MDME s return to profitability over the last 12 months is on the back of seven execution projects representing some US$600m of confirmed contract value work with leading mining industry names. In its accompanying statement management expressed confidence about second half earnings, and points to a pipeline of potential projects valued at c US$ bn. Contract pipeline with blue-chip client list MDME has shown a steady increase in execution contract orders and bankable feasibility studies (BFS) in the last six months as sentiment has improved in the mining market. The projects are currently in different stages of development, which allows resources to be efficiently deployed and will ensure a steady workload over the next 18 months. MDME is now working with an increasingly blue-chip client base, including companies such as ENRC, Metorex, Gold Fields and African Barrick Gold, which all have multiple projects in Africa and beyond. While the execution contracts amount to approximately US$600m, the studies being undertaken represent potential projects that could be worth US$ bn in potential work. Valuation: Premium yield MDME s prospective P/E multiple in FY12 is at a discount to all of its peers and only at a slight premium to the average of its peers in FY13. Should MDME win the execution contract for the Evander 6 shaft project (multi-stage [3x] ± 34ktpm gold plant) in South Africa, the FY13 multiple would become a significant discount to those of its peers, being just seven times FY13 EPS. Currently we forecast it will pay a dividend that will give it the second highest yield of its peers in FY12 at 4.7%. Share details Code MDM Listing AIM Sector Mining Shares in issue 37.5m Price 52 week High Low 115.0p 93.0p Balance Sheet as at 30 September 2011 Debt/Equity (%) N/A NAV per share (c) 47.5 Net cash (US$m) 11.8 Business MDM Engineering Group is a mining services company focused on gold, uranium and base metals in Africa. Valuation e 2013e P/E relative N/A 112% 138% P/CF EV/Sales ROE N/A 25% 21% Geography based on revenues (2011) UK Europe US Other 0% 0% 0% 100% Analysts Rory Draper +44 (0) Charles Gibson +44 (0) mining@edisoninvestmentresearch.co.uk MDM Engineering is a research client of Edison Investment Research Limited

2 2 Edison Investment Research Update MDM Engineering 16 December 2011 Financial highlights Improved sentiment in mining market conditions for MDME resulted in substantially sound financial results for the six months ended 30 September Revenue was US$19.8m compared to the same period in 2010 at US$7.2m, an increase of 176%. Gross profit rose 398% to US$7.52m at a margin of 37.9% (2010: 21%). Other notable financial results include: Pre-tax profit of US$3.31m (2010: US$2.48m loss). Net cash of US$11.9m as at 30 September 2011 which has increased to US$14.5m as at 6 December Basic earnings per share of 6.51 cents per share (2010: 4.78 cents loss). Interim dividend policy 50% payout ratio On the basis of its current profitability, MDME has declared an interim dividend of 2.5 cents per share. MDME plans to continue with its dividend payment policy of 50% of any earnings after tax, with one-third assigned to the interim dividend, and the remaining two-thirds to the final dividend. This implies a final dividend of 5.0 cents, equating to 7.5 cents for the full year and slightly ahead of our expectation of 7.0 cents. H212 forecasts Exhibit 1 below compares MDME s interim results to the comparative period last year and shows Edison s full year FY12 estimates. At the net level, management expects H2 to exceed the results from H1, given the superior trading conditions for the mining industry, the current seven execution projects in progress, and a current study pipeline worth potentially US$ bn. On a gross level, the variance between the first and second half of FY12 is primarily due to the Tharisa Expansion Project, which initially was contracted in the beginning as a lump-sum turnkey (LSTK) type contract which then transferred in the second half of the financial year to an engineering, procurement, construction and management (EPCM) contract. The LSTK contract records the revenues and expenses up-front and therefore ascribes greater gross profit in the first half of the year. Management anticipates the current and potential workload will support MDME s growth over the next five years.

3 3 Edison Investment Research Update MDM Engineering 16 December 2011 Exhibit 1: H1 Actuals and implied H2 figures per FY12 estimates Description H111 H112 Prior Period H212e 2012e Variance (%) Revenue 7, , % 50, ,339 Cost of sales (5,68 3.1) (12,318.0) 117% (46,097.3) (58,415) Gross profit , % 4, ,924 Operating expenses (3,8 23.4) (4,437.9) 16% (2,004.8 ) (6,443) Depreciation and amortisation (125.4) (110.7) -12% (156.3) (267) Other income % Profit from operations (2,38 2.6) 3, % 2, ,48 4 Financial income % Financial expense (259.9) (3.1) 99% (240.0) (243) Net financial income (99.2) % Profit before taxation (2, ) 3, % 2, ,8 41 Taxation (8 72.3) -226% (605) Marginal tax rate (%) % (10.6) 16 Profit for the year (1,791.0) 2, % 2, ,236 EPS (4.78 ) % Fully diluted EPS (cents) (4.72) % DPS (cents) % Dividend cover (9.56) % Gross profit margin (%) % Source: Edison Investment Research Project pipeline MDME is working on the execution of seven medium to large size projects. These projects are currently in different stages of development, which allows the spread of resources and will ensure a steady workload over the next 18 months underpinning results for not only FY12, but also FY13. Four projects are in the construction phase, one in the engineering and procurement phases and two projects are in early set-up. The Namoya Project in the Democratic Republic of Congo (DRC) is the most recent addition to the list since the previous update note. The execution project pipeline is as follows: Kalagadi Manganese Umtu Project work continues on the EPCM contract for client Kalahari Resources at Hozatel in South Africa. The 3Mtpa manganese crushing, screening and sintering project capex is c US$195m. MDME has been involved with the project since 2007 with the award of the BFS, which was completed in 2008, and the front-end engineering and design (FEED) for this project completed in early MDME has completed a BFS for the c US$60m, 40,000tpm Kinsenda concentrator in Katanga in the Democratic Republic of the Congo (DRC). Now funded and refinanced, MDME has mobilised key personnel to site to start early engineering works and the procurement of long lead items, while the next phase of the full execution contract (likely to date from April 2012 after the end of the rainy season) is finalised. The expected duration for the project is 26 months until Q313. Tharisa Expansion Project the 3.6Mtpa chromite and PGM EPCM contract for Tharisa Minerals at Brits, north of Pretoria in South Africa, continues to progress with work that began on the US$150m project in May this year. Civil concrete pouring is currently underway and hot commissioning is due in August Final details of the contract are not yet known; however, initial indications are that it will be an LSTK type contract. On 12 September MDME announced that it had been awarded the Gold Fields Limited EPCM contract for its Tarkwa project in Ghana. The award follows the completion of a

4 4 Edison Investment Research Update MDM Engineering 16 December 2011 conceptual study by MDME in September 2010 and entails the US$20m optimisation of the CIL Crushing and Screening Plant Expansion. ENRC s Camrose Project in the DRC MDME has been engaged to build and refurbish two 2Mtpa dense media separation (DMS) plants. The initial project value of the first DMS construction project is US$18-20m and it is expected to be completed in early 2012, after which MDME s on-site personnel will be redeployed to the Kinsenda Copper Project (also in the DRC). The value of the project for the second unit s refurbishment is currently being determined. Mintek Atomiser Project Operations continue on the c US$6m Water Atomisation Process Plant for Mintek in South Africa. As indicated on page 1, this will be a LSTK contract with completion expected by April Recent additions to the project pipeline are: Namoya Project Project set-up and final test work are in progress for a 2Mtpa gold heap leach and CIL recovery plant for Banro in the DRC. MDME s share of the project is expected to be valued at approximately US$60m, with a margin of c 8% on this amount. Formal approval for engineering and procurement is due in Q112 with commissioning expected in Q213. In addition to the project pipeline, MDME is actively engaging in the Australian market and aims to participate in projects in Africa, owned by Australian-listed companies. Management believes it is well positioned to benefit from this in the short to medium term. As a result of its relationship with Australia s GR Engineering, MDME has also pre-qualified for a project being developed by Chalice for a LSTK contract in Eritrea. Business model and project contracting MDME has been able to adapt its business plan rapidly to reflect changing market conditions and a healthy mix of risk profiles MDME historically operated according to an incentivised EPCM contracting model, earning margins in two ways: 1) a margin on the capital portion of the projects in which it is engaged (c 8% originally, but typically now c 6.5%, including a portion at risk on achieving schedule and budget targets); and 2) via the supply of technical expertise on a time basis at an appropriate charge-out rate. The engineering, procurement and construction (EPC) projects have generally been engineered to a point whereby sufficient information was available to address typical risks of price, quantities and schedule. Currently only two of the projects are contracted on the EPC methodology, while the other projects are mainly on an EPCM basis.

5 5 Edison Investment Research Update MDM Engineering 16 December 2011 Relative valuation MDME s valuation relative to its peer group, in terms of forecast EPS, is shown in Exhibit 2. Exhibit 2: MDME P/E vs peer group (FY) Company Yr1 P/E Yr2 P/E Yr1 dividend yield (%) Lycopodium Ausenco Outotec Simple average MDME Source: Thomson Financial, Edison Investment Research MDME s prospective P/E makes it the cheapest of its peers for the year to March 2012 and a slight premium to those peers for the year to March It is most notable that MDME is forecast to provide a dividend yield in FY12 above all but Lycopodium (NB: Lycopodium s dividend cover is c 1.4x compared to MDME s 2x). Outlook and sensitivities In July, MDME won the BFS for a modular gold recovery plant for Taung Gold s Evander 6 shaft project, a multi-stage (3x) ±34ktpm gold plant. Should MDME be awarded the execution contract for the project, we would adjust our forecast EPS for FY12 to around US 14.0 cents indicating a P/E multiple of 10.8x and in FY13 EPS c 21.5 cents at a P/E of 7.0x, at a discount to its peers for both FY12 and FY13.

6 6 Edison Investment Research Update MDM Engineering 16 December 2011 Exhibit 3: Financials US$'000s e 2013e IFRS IFRS IFRS IFRS IFRS Year end 31 March PROFIT & LOSS Revenue 35,917 33,159 20, ,339 44,68 6 Cost of Sales (25,459) (28,995) (23,151) (64,8 58 ) (38,8 46) Gross Profit 10,458 4,165 (2,345) 5,48 1 5,8 39 EBITDA 10,590 4,165 (2,345) 5,48 1 5,8 39 Operating Profit (before GW and except.) 10,458 3,939 (2,612) 5,214 5,572 Intangible Amortisation Exceptionals Other Operating Profit 10,724 4,536 (2,440) 5,48 4 5,8 42 Net Interest Profit Before Tax (norm) 11,58 1 5,037 (2,250) 5,571 5,8 79 Profit Before Tax (FRS 3) 11,58 1 5,037 (2,077) 5,8 41 6,149 Tax (3,741) (1,571) 622 (605) (1,291) Profit After Tax (norm) 7,8 40 3,466 (1,456) 5,236 4,8 58 Profit After Tax (FRS 3) 7,8 40 3,466 (1,456) 5,236 4,8 58 Average Number of Shares Outstanding (m) EPS - normalised (c) (3.9) EPS - normalised fully diluted (c) (3.6) EPS - FRS 3 (c) (3.9) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 1,38 4 1,521 2,320 2,053 1,78 6 Intangible Assets 927 1,003 1,737 1,737 1,737 Tangible Assets Investments Current Assets 21,039 20,027 24, ,699 30,050 Stocks Debtors 7,072 9,932 6, ,344 7,924 Cash 13,967 10,096 17, ,355 22,126 Current Liabilities (6,402) (2,772) (8,763) (13,8 90) (8,545) Creditors (6,378) (2,745) (8,749) (13,8 90) (8,545) Short term borrowings (24) (26) (15) 0 0 Long Term Liabilities (31) (14) (1) (1) (1) Long term borrowings (31) (14) (1) (1) (1) Other long term liabilities Net Assets 15,990 18,762 18,243 20, ,290 CASH FLOW Operating Cash Flow 10,18 8 (558 ) 8, ,18 5 Net Interest Tax (4,402) (2,609) (93) (605) (1,291) Capex 275 (150) (299) 0 0 Acquisitions/disposals Financing 6, Dividends (2,903) (4,199) (506) (2,618 ) (2,429) Net Cash Flow 10,957 (7,014) 7,474 (2,470) 6,771 Opening net debt/(cash) (4,472) (13,912) (10,055) (17,8 24) (15,354) HP finance leases initiated Other (1,517) 3, Closing net debt/(cash) (13,912) (10,055) (17,8 24) (15,354) (22,125) Source: Company accounts/edison Investment Research EDISON INVESTMENT RESEARCH LIMITED Edison Investment Research is a leading international investment research company. 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