"Questions now are, Who funds the working capital build that...

"Questions now are,
Who funds the working capital build that will be required over the next 6 months?
Some kind commercial lender, on not-overly-usurious terms?
Or does recourse get sought from shareholders for the dough?"


Well, it took a while but we got the answer today (pricey money, but not overly usurious):




Coupon rate = 10.5%, which is not cheap, but it's a darn sight cheaper than the company's cost of equity capital currently.

And conversion terms highly favourable to MCE (viz., 35cps), although early redemption terms quite favourable to the note holder (especially within 24 months).

All up, its the medicine that needed to be taken and which - by my estimates and looking at the business's historical Working Capital-to-Prospective Revenue relationship - the $7.5m note proceeds should fund the working capital of the current order book with $3m or $4m to spare, meaning that the company is in a position to take on additional orders (up to, say $60m) without tapping current capital reserves.

This funding package is an important milestone, which now allows us to have a half-decent stab at what the the P&L might look like under various scenarios as the company exits FY2023:





NB. The Gross Margin warrants discussion, especially since the P&L leverage (normal operating leverage plus significant lease leverage) is pronounced, meaning small changes in GP Margin will have significant bottom-line impacts, making the GP Margin almost the single most critical input parameter for MCE's future financial performance.

Trouble is, because the GP Margin is so variable, it is also notoriously difficult to forecast:

When demand for MCE's products is cyclically dampened, as was the case for the past decade when low oil prices meant limited investment in new oil production capacity, MCE's GP Margins averaged in the low teens (and even went negative between 2017-2021).

Conversely, when price signals induce the global oil industry to invest in new capacity (or to play catch-up deferred maintenance), the MCE's GP Margin gets up to 30% (for context, FY2008 was 37%, FY2010 was 31% and in FY2011 the GP Margin was 29%).

Clearly, the oil price boom of the past 12 months is causing an increase in new capacity investment, so it is not unreasonable to assume we are heading into a "30% GP Margin" environment, as opposed to a 15% one.

As a matter of prudence, I'm kicked the discussion off with an assumption of the company exiting FY2023 at a 25% GP Margin run-rate.

As can be seen, the pro forma abridged P&Ls above suggest the company is approaching EBITDA and EBIT run rates between, respectively, $8.8m-$10m and $4.8m-$6.0m, with the middle-road scenario of ~$9.5m EBITDA and $5.5m EBIT.

For a $30m EV company, that equates to around 3.2x EV/EBITDA and 5.6x EV/EBIT

Now I know this business isn't the prettiest swan on the lake, but at at those sorts of valuation multiples, it's priced like a grotesque ugly duckling... which it is when there is no demand for its products and services.

But that's no longer the case today.


PS. In the scenarios above, $60m in the highest assumed level of Revenue. But that's merely to reflect a possible Revenue run rate achievable in the near-term (next 6 to 9 months). In reality, MCE's resources and infrastructure have the ability to operate at sales capacity a lot higher than $60m; if the demand was there, the company could do $100m of Sales.

Now build the P&L off that sort of Revenue base....


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