Having spent that past few weeks trawling through the entrails of MND's Annual Reports going back a little over a decade or so, and having applied some financial diagnostics to the trends in some of the financial metrics that I consider to be important, I came away quite astounded at the performance of MND.
Starting with the observation that most quite readily make, namely the significant net cash balance the company holds.
Despite the slump in the mining sector in recent years, MND's net cash balance is currently at record high levels ($187m @30 June 2015/$183m @31 December 2015).
MND's Net Cash Position (@ Financial Year End) [all figures in $m]:
2005: 4.7
2006: 35.3
2007: 73.9
2008: 101.6
2009: 127.3
2010: 116.6
2011: 129.5
2012: 152.9
2013: 140.2
2014: 180.8
2015: 186.6
And, viewed through the lens of the classical measure of solvency, the Current Ratio, the story of record surplus capital is exactly the same:
MND's Current Ratio:
2005: 1.36
2006: 1.19
2007: 1.19
2008: 1.15
2009: 1.19
2010: 1.17
2011: 1.19
2012: 1.26
2013: 1.40
2014: 1.67
2015: 1.63
2016 (interim): 1.74
Of course, what must be remembered when it comes to defining the financial pedigree of MND is that it make very little use of its own capital going about its business - PP&E currently sits at less than $100m (the highest it ever reached was $150m, right at the peak of the cycle, when the company was generating annual Revenue in excess of $2.5bn). Asset turnover averages almost 4.5 times across the cycle, which is very high.
The asset-light nature of the business results in the 50% ROE average across the cycle (with peaks over 70% during the boom times, and down to lows of ~20%, which is where we roughly sit currently).
Of course, as the economic saying goes, "there's no such thing as a free lunch", and the way MND generates these superior rates of return (apart from managing the day-to-day operations of the business very well), is by financing a large part of its fixed capital requirements through operating leases and hire purchase arrangements.
These off-balance sheet liabilities are not insignificant, as shown below:
MND's Off-Balance Sheet Commitments (all figures in $m)
2005: Hire Purchase (HP) = 17.4; Operating Leases (OL) = 7.4 TOTAL = 24.8
2006: HP = 26.4; OL = 12.7 TOTAL = 39.1
2007: HP = 27.1; OL = 17.7 TOTAL = 44.8
2008: HP = 24.0; OL = 27.5 TOTAL = 44.8
2009: HP = 24.2; OL = 40.7 TOTAL = 64.8
2010: HP = 32.4; OL = 89.4 TOTAL = 121.8
2011: HP = 42.9; OL = 177.0 TOTAL = 219.8
2012: HP = 48.5; OL = 110.1 TOTAL = 158.6
2013: HP = 44.5; OL = 147.6 TOTAL = 192.1
2014: HP = 31.3; OL = 106.7 TOTAL = 137.1
2015: HP = 21.6; OL = 77.2 TOTAL = 98.7
As can be seen, when demand for its services rise, as it did during the mining boom which peaked in around 2011, the company draws increasingly on fixed assets via hire purchase and operating lease arrangements, and vice versa when the cycle declines, as it has done in the past few years.
Where it can be done well, this model of "variable-ising" the capital costs of a business is a great one.
So, I really think the better way to view MND's "true" surplus capital position, is to net off all these committed totals, from the cash balance.
(Yes, I know that the bulk of these commitment amounts are non-current in nature, so I acknowledge that this is quite a conservative approach to analysing the financial wherewithal of the company, but I think approaching things from such a harsh standpoint is the prudent thing to do.)
So here's what the trend looks like (basically its simply Series 1 above minus Series 2):
MND's Net Cash LESS Hire Purchase and Operating Lease Commitments (all figures in $m):
2005: -20.1
2006: -3.8
2007: +29.1 [*]
2008: +50.1 [*]
2009: +62.5
2010: -5.3
2011: -90.3
2012: -5.7
2013: -51.9
2014: +42.9
2015: +87.9
2016: ~+120 (forecast)
[*] denotes periods in which special dividends were paid
As can be seen, not just in absolute terms, but also relative to its capital commitments, the company is in the best financial shape that it has ever been.
And that this improving fiscal health is occurring in the face of a most severe downturn in MND's markets (i.e., the resources sector), is quite a significant statement, I think, about the quality of the business, and the way its capital is managed.
(And yes, I know that some capital has been conserved due to the reduction in the dividend in the past two years, but even if dividends were maintained at their commodity cycle peak levels, the company would still today be in a position where its net cash balance was some $30m in excess of is total commitments and, importantly, that metric would still be rising. Such is the financial potency of the business. Verily, an embarrassment of riches.)
So for me, as a relatively new part owner of this business for the first time ever (largely because of the findings above), the question that I ask myself is the following:
"What is our board going to do with all the excess capital of the business?"
This company has form in paying special dividends in the past.
It has been a long time since the past ones - 2005, 2006 and 2007 and the company is today in far, far better financial shape than back then.
And the franking credit balance is today three times higher than then [$53m (57cps) @ 30June 2015 vs $16m (20cps) @ 30 June 2006].
Either that, or a material acquisition is being planned. But this would be totally out-of-character for the long-serving MND board, whose DNA when it comes to growing the business, has been to opt for the less-risky - but admittedly slower - organic path.
For mine, I trust that a meaningful special dividend is on the cards at the upcoming full-year result, rather than some blockbuster deal (even if it is justified as a bottom-of-the-cycle purchase).
I fully expect that, like it has done for many years, that boardroom sanity will prevail.
PS. Keen enthusiasts of reading Annual Reports would point out that MND at 30 June 2015 had some $390m of performance guarantees (down from $507m @ 30 June 2014). The way I treat these potential liabilities is that I make myself aware of them, but I don't put too much emphasis on them - especially in MND's case - because they are contingent in nature and with MND's industry-leading reputation and track record of high-quality work, these bonded contractual arrangements are rarely called in by the customer.
(If, when looking at a company, I felt the need to actively incorporate the calling in of performance guarantees into my investment thinking, then that would not be a company in which I would care to invest, in the first place)
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