MAAS Group: Strong first half sees MGH back on track

About the author:

Author name:

By Liam Schofield

Job title:

Analyst

Date posted:

10 February 2023, 7:30 AM

Sectors Covered:

Industrials

• MAAS Group (ASX:MGH) have provided guidance for HY23 of $64m-$66m (incl revaluations | no prior HY guidance split) and reaffirmed guidance for FY23 (EBITDA: $150m-$180m - no change). The HY23 guidance beat our prior estimate by c.9% on a L4L basis, pointing to the strength in operations during HY23.
• Gearing is likely to remain elevated for 1HFY23, albeit potentially decreasing through 2HFY23 as the company settles the bulk of its FY23 development book (residential lots and houses).
• ADD rating retained with our target price increased to (login to view).

Event – Market update

The company expects to report HY23 Pro Forma EBITDA in the range of $64m- $66m (incl revaluations), a 60% increase on the pcp. The company also reaffirmed full year guidance for FY23 Pro Forma EBITDA of $150m-$180m. 

FY23 result will be strongly second half weighted, driven by the expected return to normal operating conditions for several major infrastructure projects with more favourable weather conditions expected in the second half.

Analysis

The HY23 guidance suggests the business has successfully navigated the wet weather of Q1FY23 and returned to strong operating conditions.

The implied skew for FY23 of 39/61 (FY22A: 31/69), suggests there could be risk to the upside. The caveat being, we don’t know how many lots were delivered in HY23 (Morgans est: HY23: 70 lots | FY23: 310 lots).

Cash flow conversion will likely be weak for HY23, a result of capitalised development costs for land which is to settle in 2HFY23 and the capitalising of the recently acquired Newcastle development site to inventories.

We anticipate that cash conversion will have been good for the Civil Construction and Hire division and fair for the Construction Materials Division.

Change to earnings forecasts

We have incrementally increased our Construction Materials and Civil Construction and Hire earnings to reflect the strength in HY23 operations. We have also updated our forecasts to reflect revaluations being split between half years.

Whilst our prior estimates excluded any revaluation provision in HY23 (FY23: $20m), we have since split our forecast revaluation gains (non-cash) between the HYs (ie our prior HY23 EBITDA forecast of $49.5m, plus updated HY23 revaluations of $10.0m = $59.5m - company beat our prior estimate by c.9%). 

Offsetting these earnings improvements is an increase in net debt and working capital draw for HY23.

Investment view

Our target price increases to (login to view).

Price catalysts

Confirmation of a return to trend growth. HY23 earnings were clearly impacted by wet weather. Investors will likely need to see a return to trend growth and consolidation of existing operations prior to any re-rating. 

Stabilisation of interest rates. Interest rate volatility is notable and likely impacting MGH’s residential lot sales rates. A leveling of interest rates will likely improve sales conversion rates.

Risks

Working capital. Like FY22, there is a risk that cash conversion would remain weak were MGH forced to stockpile inventory as the housing markets slow. 

Cost escalations leading to margin decline. Several comparable companies have recently reported that cost inflation is running ahead of revenue growth. Whilst MGH has managed to maintain margins, cost inflation remains a risk. 

Real estate is a cyclical business. The growth of the wider MGH business is partially contingent on the growth of the real estate division (cross-selling). A material slowing in lot volumes or a decline in prices would impact profitability.

Find out more

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

If you would like more information, please contact your adviser or nearest Morgans office. 

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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.