Contracting a strong resultProfit up 80%. Revenue up 55%....

Contracting a strong result

Profit up 80%. Revenue up 55%. Astrong growth outlook. The annual financial result from mining servicesbusiness Macmahon (MAH) was one of the better results thisreporting season. But the share price is down 20% over the past year as aseries of missteps have dented confidence in the company.

The first issue arose at the half-year result inFebruary. An employee bonus scheme meant most of the earnings above the low endof management’s previously guided range was to go to staff. The second camewhen two directors unexpectedly resigned. The third when the company entered aformal dispute with a client over a large contract.

None of these issues are individually significantand they are being addressed.

The profits for last year were in the middle of theforecast earnings range, after the payment of $3m for the employee bonusscheme. A smaller bonus pool, with more stringent conditions, is in place forthis year.

Resigning directors have been replaced with boardmembers who will bring plenty of experience and independence to their roles.The first is Vyril Vella, a former Macmahon director who, despite being a CIMIC (CIM) appointee to the board, joinedwith the rest of the board in resisting a lowball bid from the constructiongiant 2017.

Two other experienced industry participants, bothformerly employed by CIMIC subsidiaries, have also joined the board. CEO MickFinnegan will also step up to the board table. With seven members and fourindependent non-executives the board will be able to keep AMNT, Macmahon’slargest shareholder and a major client, in check.

The dispute over Newcrest’s Telfermine also looks to have been put behind the company, though a formal agreementis still to be signed off. It has been problematic and loss-making for years.Macmahon management now expect the project to be cash flow positive afternegotiating for increased contract rates. If management didn’t push hard toachieve fair rates the company could have been facing a loss of $25m to $35mover four years. Mostly forgotten as these corporate issues gripped investorattention is the company’s strong operational performance.

Tropicana and Batu Hijau, Macmahon’s largestcontracts, continue to perform well. These reached record volumes, as did newcoal and gold projects at Byerwen and Mt Morgans. The company is pushing intounderground mining with the purchase of GBF, an underground specialistcontractor. It is contracted to perform work worth $4.7bn and has the potentialto win $7bn more over the next few years.

Earnings forecasts for this year are well supportedby contracted work and a contribution from the GBF acquisition. At the middleof the new guided earnings range, Macmahon shares trade at just eight timesthis year’s net profit.

Management has had a year of working hard to putout fires. Now, with some issues being resolved, they can finally get on withthe job delivering for clients and shareholders.