MAAS Group: Regional tailwinds support strong outlook

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Analyst
Date posted:
15 December 2020, 1:00 PM
Sectors Covered:
Agriculture, Food & Beverage, Chemicals and Travel

  • We initiate coverage of Maas Group Holdings (ASX:MGH) with an Add rating and updated target price (login to view).
  • Over FY20-23F, we forecast MGH to deliver an EPS CAGR of 22% driven by material growth in quarry sales volumes, increased residential sales and strong activity levels in civil and infrastructure end markets.
  • MGH provides investors exposure to a founder-led business benefitting from positive industry tailwinds and further upside potential from accretive M&A.

MGH – leveraging infrastructure, real estate and mining tailwinds

MGH is a leading independent Australian construction materials, equipment and services provider with diversified exposures across civil, infrastructure, mining and real estate end markets.

MGH operates a diversified yet complementary set of businesses, with a core focus in regional NSW, supported by a growing offshore manufacturing presence.

Real Estate: exceeding near-term expectations; long sales pipeline

MGH has a long dated residential (15 year) and commercial (7 year) property development pipeline, with a unique concentration on fast growing regional NSW cities.

As at 1-Dec, MGH had sold 197 residential lots and with 7 months remaining in FY21, it is on track to exceed prospectus forecasts of 208 settlements (vs. 125 in FY20).

With expansion into Tamworth on track (c100 lots pa), we forecast lot sales to rise to 300 in FY22, which underpins our 3-year underlying EBITDA CAGR of 29% for the segment.

Construction Materials: step-change expected from FY22 onwards

MGH has established a dominant network of quarries (20 sites; 9 currently operating) along the Inland Rail (c5 years of demand) and Newell Highway (c10 years of demand) corridor in regional NSW.

MGH expects to start supplying into the Inland Rail from 4Q21 onwards, with these projects coupled with local baseload demand (c1mt pa) expected to support a material increase in quarry sales volumes from 1.0mt in FY20A to 2-3mt over the next few years.

We forecast an ongoing ramp up in quarry volumes over FY21-23F, which underpins our 3-year underlying EBITDA CAGR of 22% for the segment.

Civil and plant hire: FY21 contracted; building FY22 order book

The Civil Construction & Hire (CC&H) business has a favourable medium-term outlook underpinned by Federal and the State Government’s commitment to accelerate infrastructure investment.

Importantly, high levels of project activity are expected in MGH’s core market position in regional NSW and the business will also grow off the back of its Real Estate business.

Pleasingly, this segment is currently exceeding MGH’s FY21 expectations, with plant utilisation high, new contracts recently won, 100% of FY21 work in hand secured and filling the FY22 order book now underway.

Over FY20-23, we forecast CC&H to deliver an underlying EBITDA CAGR of 14%.

Underground: currently lagging, but growth potential remains

While MGH’s smallest business unit, FY21 YTD trading has been below internal budgets. Utilisation levels in EMS have been impacted by the timing of large contracts finishing (project activity to ramp up in 2H21), while COVID-19 has weighed on VMS.

The mediumterm opportunity to leverage the group’s low-cost manufacturing position in Vietnam and increase equipment sales remains.

Investment view – Add rating and updated target price

Overall, MGH is tracking to its internal budget. We forecast FY21 underlying EBITDA of A$75.0m (+16% yoy), with the assets in place to drive further strong growth over FY22/23 (MorgansF +30/10%).

Additionally, we think MGH has A$90-130m in balance sheet capacity to pursue accretive M&A opportunities. Consequently, we initiate coverage with an Add rating and A$3.05 target price.

MGH provides investors exposure to a founder-led business (75.4% insider ownership) benefitting from positive end-market tailwinds.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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