MDM Engineering Group FY12 Results And Re-Rating

MDM Engineering Group’s (MDME) strong results for the 12 months ended 31 March 2012 included a doubling of the full-year dividend. MDME’s return to profitability over the last 12 months is on the back of eight current execution projects representing c USD 600m of confirmed construction contracts with leading mining industry names.

MDME’s blue-chip client base now includes companies such as ENRC, Gold Fields and African Barrick Gold. In its final results released on 20 June, management expressed confidence in FY13, with a pipeline of current and potential projects valued at c US$1.5-2.0bn, and believe the current favourable trading conditions provide further confidence for the current financial year.

Turnover grows, margins narrow
With full-year profit before tax of USD 7.8m compared to a loss of USD 2.1m in 2011, there can be little doubt that MDME is riding the mining capex boom. Industry capex remains buoyant despite market commentary about delays and uncertainty surrounding resources projects, and even though commodity prices have fallen recently (but are still at very healthy levels).

Against this backdrop MDME has shown a steady increase in execution contract orders (typically 15-24 months) and bankable feasibility studies (BFS) as activity has improved in the mining market. The order book for MDME has increased beyond levels experienced in 2008 and completely returned to pre-global financial crisis levels. We forecast that positive cash flows are underpinned at least until FY15. Against a background of increased competition returning to the industry, we believe gross profit margins should fall slightly from 25% in FY11 to c 18% in FY13.

Valuation: Highest yield and further upside
We have adjusted our financial forecasts and updated MDME’s portfolio of execution projects and studies. We calculate that MDME’s prospective P/E multiple (base case scenario) in FY13 is at a discount to all of its peers and at a slight discount to the average of its peers in FY14. If MDME converts its potential projects – Taung Gold (Evander 6 Shaft) and Asia Minerals (Kudumane) – to full-execution contracts in FY13, we forecast the company will increase earnings from USD 11.4m to USD 15.1m, which on today’s P/E multiple of 7.3x would indicate a value of c 191p/share. Based on MDME’s dividend policy, we forecast a dividend that will give it the highest yield of its peers at 6.8%.

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