Small Caps | Dec 22 2022
This story features MADER GROUP LIMITED. For more info SHARE ANALYSIS: MAD
Brokers are enthusiastic on the opportunity for Mader Group, particularly the growth possibilities in North America.
-Brokers praise the past performance and opportunity for Mader Group
-Moelis issues new research and expects further share price upside
-Mader has a competitive advantage over OEMs and attracts employees
-Earnings outlook potentially supported by overseas expansion
By Mark Woodruff
Shares in specialist equipment maintenance service provider Mader Group ((MAD)) have had an explosive run since August 2021, trading up to the current price of $3.57 from around $1.00.
Moelis expects more share price upside and commences research on the company with a Buy rating and 12-month target price of $4.05.
This target closely aligns with those of Bell Potter ($4.20) and Shaw and Partners ($4.09). Both Buy-rated brokers raised their targets (around two months ago) in reaction to a September-quarter revenue and earnings beat by the group compared to expectations, along with upgraded guidance by management.
Mader provides specialist labour for the maintenance of heavy equipment in the resources and energy industries. Ancillary services also include electrical and mechanical maintenance for the rail, power generation and marine markets.
Over the last three years, the company's talent pool has grown by more than 39% per annum to tally more than 2,200 employees as at June 30, 2022, while service vehicles (key equipment for on-site maintenance) have grown at a similar rate to now exceed 900.
It’s this scale, explains Moelis, that provides a competitive advantage, which allows services to (typically) be offered at more attractive pricing relative to original equipment manufacturers (OEMs).
In straightened times for labour availability, the group can also attract talent because of diversified equipment and sites, and the opportunity for international travel, explain the analysts.
Within the domestic market, which has many smaller operators, the broker estimates the group has a 30% market share.
Key commodity exposures for Mader are iron ore, which accounted for 41% of FY22 revenue. Gold and coal also made up 24% and 17%, respectively.
While Australia provides 85% of group revenue, Moelis expects an acceleration penetration of the larger North American market at twice the 10% margin achieved domestically.
Bell Potter also believes Mader’s earnings outlook is underpinned by ongoing expansion of the company’s core service offerings into the US and Canadian mining and energy sectors.
Part of the investment thesis by Moelis also relies on further expansion of the already dominant position in the Australian market. This outcome should be driven by resilient production and volume growth, strong commodity prices, a normalisation of capital expenditure spend and ageing production fleets.
The first quarter trading update
Shaw and Partners noted from the first quarter update in late-October ongoing outperformance on the domestic scene and internationally.
Alongside overall solid growth, the analysts noted utilisation rose in core markets and further personnel were sent offshore.
Revenues of $135.3m increased by 48% compared to the previous corresponding period, beating the broker’s expectation for $120m. Earnings also rose by 46%, despite further investments, with the broker expecting further cost-base leverage.
Management revealed new FY23 revenue guidance of at least $550m, up from $510m, and increased profit guidance by 7% to $35.5m.
While Shaw felt like a broken record in again upgrading its earnings forecasts, Bell Potter went with the flow and predicted further guidance upgrades by management during FY23.
The analysts went on to provide some North American insights.
The significant opportunity in North America
Following quarterly updates by several Heavy Mobile Equipment OEMs in North America, Bell Potter observed (in early November) mining activity remains robust, suggestive of healthy utilisation of equipment.
Miners were generally committing to more capital expenditure, given a strong equipment backlog and quarterly revenue growth.
This industry feedback prompted Bell Potter to increase its FY23-25 EPS forecasts for Mader by 2%, 7% and 7%, respectively, based on new revenue growth assumptions for the group’s North American segment.
Such anticipated momentum by Bell Potter augers well for the significant opportunity identified by Moelis.
This broker feels the North American market is ripe for disruption as incumbent service providers are either OEMs or lack the scale of Mader Group.
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