Interesting reading Jackie, would like to know more of the plans...

Interesting reading Jackie, would like  to  know  more  of  the  plans to  expand across  the  nation .. I see  lots  of  opportunities  in  the capitol cities and large provincial towns  to  grow  this  company..Sent email   to  the  company re future advancement .....Will  expose the document  you  posted  ... Vin .............................
Summary

MCS Security provides security solutions to Perth businesses and homes and is currently looking to expand nationally. MCS recently listed via a “back door” listing via Red Gum (ASX:RGX) by raising $4.5m in order to purchase two security companies, namely MCS Security and Integra Security. The security services are provided to major commercial property sites, retail shopping centres throughout WA, sporting stadiums, special events, mobile patrols and electronic security installation and monitoring.
Key points

MCS Security provides security solutions to Perth businesses and homes and is currently looking to expand nationally. MCS recently listed via a “back door” listing via Red Gum (ASX:RGX) by raising $4.5m in order to purchase two security companies, namely MCS Security and Integra Security.
The security services are provided to major commercial property sites, retail shopping centres throughout WA, sporting stadiums, special events, mobile patrols and electronic security installation and monitoring.
The terms of each job are typically multi-year contracts on a “cost plus” arrangement which works out to be around ~30% GP. This type of contract is lower risk than being contingent on KPI like some other contracting businesses e.g. SPO. The group to date has had an excellent track record of rolling over these multi-year contracts highlighting the focus on providing great service.
Details of the acquisition of the two entities are:

1. MCS Security ($12-15m revenue) - $3.78m + 30m shares = $5.28m
2. Integra Security ($2-3m revenue) – 18m shares + 6m share (FY16 earnout) = $1.2m
3. FY16 earnings are expected to be $1.92m translating to a 3.4x P/E multiple

My understanding is these types of unlisted business transact on btw 3-6x P/E multiple for business generating ~$10-$20m and 6-10x P/E multiples for $50m revenue businesses.
Initial impressions on Mgt are very positive including their:

1. Targeting 50m in revenues in medium term via both organic growth and acquisitions which based on the above P/E multiples would highlight earnings accretion should be pretty easy without even taking into account cost synergies available. The security sector is highly fragmented suggesting a “role up” of the sector is likely.
2. Contract wins as highlighted in their recent 14/1/16 announcement, including expansion into other revenue avenues and a strong pipeline of tenders on a national scale. MCS is also looking to expand into Sydney and Melbourne over the next 6 months. This suggests positive catalysts should be announced on a more frequent basis.
3. Focus on driving down costs which can be seen by their 14/1/16 announcement highlighting the synergies from the acquisitions having already been realised, changing share registery’s from Computershare to Automatic.
4. MCS business has been operating for 10+years with significant amount of prior experiences in the Security industry
5. Mgt have retained significant ownership interest @ >20%
6. Appointment of Chairmen - Hon. Robert Kucera who has many business connections in WA including Government which should certainly assist in being successful in tendering for new contracts.

Bull points

1. MCS is a high margin business with Net Income margins of ~10% - based on medium term revenue targets of $50m suggests this business could be making $5m within the next 5 years.
2. Contracts can be multiyear therefore relatively more reliable earnings stream.
3. Net cash position of $2m with a current market cap of $10m suggest EV of $8m on EBITDA (excluding amort’n of intangibles) of ~$2.7m therefore trading on <3x EV/EBITDA
4. Payout ratio is expected to be 80% which suggests a yield of >10%
5. Excellent thematic with solid industry growth tailwinds including: a) Shift from public sector e.g. police security to private sector security as Government funding comes under pressure – there are many industry studies pointing to this shift accelerating. b) Many insurance contracts for assets, buildings and events require security to be engaged and with the current threats of terrorist attacks, this will only increase the need for security.

Valuation
As stated above, this is cheap with Market Cap of $10m generating ~$18m in revenue and $1.9m in NPAT suggests a forward P/E of ~5x.
Not factoring in any growth and using a 6x P/E would suggest a valuation of $14m after including the $2m in net cash.
Medium term projection / stretch target based on $50m revenue, 10% NPAT margin and 8x P/E could see a market cap increasing to $40m in 5 years times which is when I think it will get more coverage – note to achieve this target would take M&A so it depends on how deals are structured i.e. debt vs equity therefore shares on issue would grow.
In my opinion this represents a value entry point into a business that has growth potential and therefore a long term horizon should see significant upside.
Risks

Low barriers to entry therefore increases in competition can lead to lower margins – Mgt have yet to see compression in margins – roll up of industry will limit the amount of possible margin contraction.
From my analysis, the $1.9m NPAT is based on adding back the Amort’n of intangibles
Financial Statement and accounting treatment looks questionable i.e. 1H16 writing off Goodwill (2 months after the acquisition) whilst still maintain guidance for $1.9m. Whilst this doesn’t make sense, I understand why this would be done i.e. don’t have to worry about testing for impairment in later periods, ROE looks higher etc.
Nano cap stock therefore won’t get much attention until Mkt cap gets closer to >$50m
Comments

mce-anchor
Silver Oak Capital Wednesday, March 23, 2016 - 08:56
Early days and deserves a low P/E until more evidence of synergies are presented and the ability of management to roll up companies into corporate structure.

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mce-anchor
GeorgeWhitehouse Friday, April 1, 2016 - 21:01
Good analysis, looks like a low risk entry point at this price level. Might need to wait until they deliver on the East coast expansion plans otherwise definitely one to watch.