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It is a tough time to be a construction company, but Maas Group (ASX:MGH) hasn’t fared that bad all things considered. This company, which still sits 50% above its IPO price, recorded a good FY23 result, which may see it break out of the stagnation the company’s share price has been in for much of the last 18 months.
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Meet Maas Group
Maas Group is an industrial company that offers property development services, construction materials and equipment. Being vertically integrated in this way enables the company to capture additional margin opportunities, cost synergies and provides the ability to mitigate risks across all points of the business cycle.
Maas’ clients include regional councils, state governments and several key construction companies, including Lendlease and Fulton Hogan. Projects to which Maas has contributed include the WestConnex, the Brisbane Cross River Rail and the Melbourne Metro Tunnel – in each instance providing equipment. But it also undertakes work in regional areas, especially in NSW.
It is based at Dubbo and is named after its founder Wes who retains a stake of over 50% in the business. Maas Group listed just before Christmas 2020 in a deal that capitalised the company at $529.9m. It is now capitalised at more than $1bn.
A good performance since listing
Since its listing Maas has had minimal disruption to its operations due to COVID-19 and has benefited from several factors, including government stimulus, the resources boom and strong demand for regional property. Many companies benefited from just one of these factors, but Maas has gained from several factors all at once because of its broader exposure.
Furthermore, it has not been as badly impacted by supply chain issues as some of its peers, again a testament to its broader exposure, but also to its strategic acquisitions. For instance, the Dubbo-based Astley’s Plumbing and Hardware business which the company singled out as one that would provide supply chain security in relation to building materials.
In FY21, Maas achieved $283.4m in revenue, a $39.7m NPAT and $75.9m EBITDA on a pro forma basis, all up by an average of 22%. In FY22, it made $539.1m (up 90%) and made a $61.6m NPAT (up 77%). And in FY23, it made $801m in revenue (up 49%) and a $68.9m profit (up 13%).
Sounds good doesn’t it? Of course, different divisions have had different fortune. Earnings in construction materials and commercial real estate were solid, but residential real estate has been struggling due to reduced land settlements.
For FY24, the company has told shareholders trading was forecast to be ‘broadly consistent’ with its 2H23 run rate. Consensus estimates expect $988.3m in revenue (up 22%) and a $85.6m profit (up 30%. Looking ahead to FY25, consensus estimates expect $1.1bn in revenue (up 12%) and a $107.7m profit (up 26%). And you can obtain this growth for just 11.9x P/E for FY24 – meaning a PEG multiple of just 0.5x.
Our strategy for Maas Group
We think Maas is worth $4.77 – a 36% premium to the current share price. Our valuation is based on a DCF model using consensus estimates and a 9.1% WACC. However, we would like to see it break above $3.40 before pulling the trigger because this has been a resistance level in recent months.
We acknowledge construction sentiment is quite low at the moment and this is a big risk with the stock as interest rates have risen so much and remain elevated. But we take heart in the fact that while construction companies are dropping like flies, Maas Group is thriving.
Other risks include safety issues and ESG impacts. But we take heart in the fact that its LTIFR trend has declined 46% in the last 12 months and it is developing a number of sustainability initiatives such as sustainable asphalt production, recycling concrete production and a new trial to use hybrid hydrogen as fuel replacement.
And finally, the company has told investors that it would give a further update on trading conditions at its AGM later this year and there is a risk these may not be favourable – it would be a Big U-Turn from how the company has been performing of late.
But the bottom line is, this is an impressive company that is thriving at a time many of its peers are not. So keep your eye on it.
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