Ann: Major New Contracts and Retail Sector Expansion, page-7

I calculated $1.72m in new/extended contracts. The pro-forma results from the company indicate an NPAT margin of 13.5% so these deals should hopefully add 233k to NPAT.

Based on the current price, they are on a PE of 6.6x and a fully franked yield of 12.1% assuming NPAT of $1.92m and an 80% payout ratio.

The only issue I have with the tender pipeline you have brought up from the preso is that all bar the O&G deals have passed their expected award date which means one should assume MSG didn’t win the tenders. If you look on slide 9, there are a few existing contracts that will have to be renewed or should have been renewed by now. As good of a start that this announcement is, it has not clarified a few of the risk and promises that have been made in the preso.

For a mental exercise, I put together the following basic analysis as follows:

- Low: New deals added, assumes no renewals of key contracts made and margins contract, whilst the market de-rates the stock (PE 7.5x & 7.5% yield)

- Base: FY16 revenue plus the new contracts whilst margins are maintained. The market re-rates the stock to fairer levels (PE 12x & 6% yield)

- High 1: All renewals are made plus the new contracts (FY15 rev + new) whilst margins are maintained. The market re-rates the stock to fairer levels (PE 12x & 6% yield)

- High 2: This scenario adds the O&G construction contract to the Base scenario above. Assume scale of contract lowers margins modestly (12.5%)

- High 3: This scenario adds the all other tenders from the preso (assumes they are still good) except the O&G production contract to the High 1 scenario above. Assume scale of contract lowers margins modestly (12.5%)



As one can see there is a strong asymmetry in the potential return outcomes for MSG. Given the current valuation level, MSG effectively offers a free option on firstly the company not botching up renewals and secondly winning new work or adding new services (i.e. Loss Prevention mentioned in the announcement. From here it is a game of being patient and waiting for the company to execute.