Stock: Macmahon Holdings Limited
Stock code: MAH
Share Price: $0.575 (as at Friday 25th March, 2011)
Novus Capital (14/3/2011, share price was $0.54 that day)
State One Stockbroking (14/3/2011, share price was $0.54 that day)
Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)
A common theme for so many companies reporting this quarter has been how unexpected factors such as floods, tsunamis and the like have wreaked havoc on their performance. The trick for investors is to separate those masking poor performance behind these challenging times with those actually suffering through a cyclical trough.
Macmahon Holdings (MAH) is a cyclical stock that has seen its value fall around 24 percent over the last 12 months. The question for investors is whether the stock has indeed hit a low, or if there’s further to fall.
Macmahon is a leading Australian contract mining and construction company with major projects throughout Australia, New Zealand, South East Asia and Africa. Formed in 1963 by Brian Macmahon, MAH has focussed on servicing the mining and construction sectors throughout its 47 year history.
Employing more than 3000 people throughout the globe, Macmahon’s activities include a full range of underground and surface mining services and a comprehensive construction business that encompasses transport, marine, water and resource infrastructure services.
On February 23, Macmahon reported a net loss after tax for the half year of $13.2 million, which included a $48.9 million write-down of the RGP5 Rail North Contract. For the full year, MAH management expects revenue of around $1.3 billion and a break-even result. Compared to the prior corresponding period, revenue fell 8 per cent to $601.0 m. The drop in revenues is attributed to lower business in construction.
Before significant items EBIT fell 6 per cent to $31.4m and profits fell 16 per cent to $25.6m. Earnings were affected by a $48.9 million write down of the RGP5 Rail North contract. This contract is a joint venture with Leighton building rail line for BHP in the Pilbara. Operating cash flow fell 39% to $37.2m.
Shareholders received the disappointing news that there would be no interim dividend – compared to receiving a 1.5c dividend in the previous corresponding period. The order book, of $2.1bn, was slightly down on the June 2010 total.
In Macmahon’s 2011 half-year results, management announced that in the next 6 to 12 months the company would undergo a business review of its construction segment. MAH will focus on its core strengths in each state and will restructure to improve efficiency. Contract styles and structures will be re-evaluated to find the best fit for Company. Improving commercial skills and processes for complex contracts.
John Rawicki of State One Stockbroking, who has a sell recommendation on Macmahon commented:
“First half 2011 revenue for this mining and civil engineering contractor fell 8 per cent. Operating cash flow was down 39 per cent. The outlook seems a bit dim. Any decrease in mining activity could put more pressure on revenue. Macmahon’s profit margins are thin and it faces the challenge of managing a large equipment fleet during a notoriously cyclical period.”
Novus Capital Analyst Cleo Nanni, who also has a sell recommendation on MAH says:
‘Total company revenue was down 8 per cent in this year’s first half. There was no interim dividend. NPAT (net profit after tax) is forecast at $15 million for the second half. Wait and see if the company can meet this NPAT forecast before considering to buy. In the meantime, investors should consider selling.’
Macmahon shareholders have earned a less than exemplary negative 24.4 per cent over the last 12 months. The last 6 months for MAH have been no better, as shares have been trading in a tight .18 cent range. The path of least resistance is pointing towards the bottom of the trading range at .47 cents.
Macmahon seems to be in a downtrend as highlighted by lower highs made on the price chart.
For technicians, the charts look uninspiring to say the least, with no clear indication of where prices are headed in the long term. Patient traders would probably need to watch for a break out of the current trading range before jumping on board.
In 2009, MAH formed an alliance with construction giant Leighton Holdings. Leighton’s ownership has grown from a modest stake of under 5 per cent to its current position as Macmahon’s largest shareholder holding 19 per cent, or 139,405,224 shares.
Some analysts believe that Leighton’s investment in Macmahon is a strategic move, undertaken to prevent a large offshore player using MAH as a vehicle to enter the attractive Australian market.
Leighton’s parent company, Hochtief AG, has been fighting a takeover attempt by Spanish construction group ACS – with Leighton seen as the main prize in the group.
With current earnings under pressure, Leighton recently sold its stake in India and is reviewing some of its other investments. It’s uncertain whether it is also receiving its stake in Macmahon Holdings.
Hochtief’s battle with ACS and Leighton’s recent divestures should be viewed as an unwelcome uncertainty for Macmahon shareholders.
Two big risk factors for Macmahon shareholders is the cyclical nature of the construction industry, which means earnings are especially volatile. Earnings have seesawed considerably – shrinking by 64.8 per cent, rising by 58.1 per cent, and are expected to drop by 46.9 per cent for the full 2011 fiscal year.
The second big risk factor is the impending restructure; management recently told shareholders that 2011 will be year of revaluating its business strategy.
Before taking a plunge into MAH, investors might be better off waiting for some consistency in earnings. A double dip in the global economy would also be clearly unwelcomed news.
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