"not my favourite investment by any stretch of the imagination,...

"not my favourite investment by any stretch of the imagination, but what can really go wrong at these prices?"

@mal85,

Yes, indeed, on the business quality spectrum, this company is nearly off the chart (and not on the positive side, that's for sure!)

But as you imply, the downside must surely be limited given:

1. where the investment cycle in the global oil and gas cycle appears to be, and

2. the company's discounted market value relative to its tangible asset value (even if that tangible asset value is overstated to a degree, which I suspect it probably is).


There is a lot to not like about this company, but it has an asset base capable of generating probably four times as much Revenue as the company is doing today.

When demand for the company's products and services is high, MCE has the ability to generate EBITDA in excess of $30m pa:

Across the last peak in the demand cycle, between 2010 and 2015, the company averaged around $25m in "normalised" EBITDA (and that included just $8m in FY2012 and $12m in FY2013 when gross profit margins were crunched due to the disastrous late commissioning of the company's new Henderson plant).

EBITDA peaked at $47m (in FY2011).


MCE has generated meaningful EBITDA and Operating Cash Flow over its 11-year listed life: >$100m and >75m, respectively, in cumulative EBITDA and OCF, which are large amounts in the context the company's Market Cap and Enterprise Value of less than $40m today.

Somewhat disconcertingly, however, the company has consumed all the OCF it generated, and then some, by investing almost $140m in creating and expanding production capacity, especially during the earlier years of its listed life (between 2009 to 2012).

To its credit the company's managers mostly avoided the use of excessive debt capital [*], to fund the business, preferring instead to raise equity capital (almost $100m of, it across 2010, 2011 and 2012).

Today we have the somewhat strange situation in which the company - seeing some green shoots in recovery of demand for its products - is looking to sell, and then lease back, some of the assets it created during the previous boom.

Personally, I don't see how much value gets created by doing so but what it will do is free up much-needed funds to satisfy the significant working capital demands that will accompany any meaningful upswing in revenue, should it occur.

The point is that it should obviate the need for any equity issuance that would otherwise almost certainly have been required.

So, I guess it is a positive thing, assuming that they are able to consummate a sale-and-lease back transaction on terms that don't involve selling bits of the farm off for fifty or sixty cents in the dollar.

(Of course, it will mean that the company will enter the next downturn with the added cost impost of lease payments, which will not be a good thing. But that's a problem that will only manifest itself in three, or four, years' time (and probably more like six or seven years' time).)


At any rate, the most salient point to be made, I think, is that this is a $40m company which, at some stage over the next 3 years - I can't say when exactly - will almost certainly generate EBITDA in excess of $10m, probably $20m (and possibly even as much as $30m).

If I am right in thinking that this time is not different and that the cycle is not dead, then I am quite sure that the market value for MCE will be a lot higher than it is today.

MCE is not a good quality business, but it was once a >$500m company.
Same company as it is today.
Same assets.
Same business model.
Roughly the same management.
Just a different set of market conditions... market conditions that are more likely to recur in coming years, than not.


So, while it is a stock that is very difficult to buy due to the acute lack of liquidity, I agree with your sentiment, @mal85, namely:

Plenty of valuation upside, combined with seemingly not much downside.



[*] Despite the company's market value averaging in excess of $300m during the boom period of 2010, 2011, and 2012, the company's net debt didn't even get as high as $10m. And a good thing, too, given the severe and protracted downturn in demand that followed since about 2015... otherwise the company might have gone belly-up had it been indebted.

.