BULL POINTS:
• Booming African mining sector
• High project conversion rate
• Strong order book
• Profitable, with strong cash flow and dividends
BEAR POINTS:
• Recruitment constraints
• Falling commodity prices
• Limited free float of shares
MDM Engineering is a mining services company focused on small- and medium-sized gold, uranium and base metals producers in Africa. Because the boom in resources prices has pushed up the cost of developing projects, and many junior miners lack the in-house technical and project management expertise required to develop mines, MDM's skills are in high demand.
The company's services include initial scoping studies, bankable feasibility studies, cost engineering, metallurgical process development, and procurement. But its most profitable work is in the implementation of high capital expenditure projects, most of which follow on from a previous bankable feasibility study. Because of this flow through nature of projects, the group aims to select studies that are most likely to be implemented.
Out of 46 bankable feasibility studies completed by MDM that subsequently developed into projects (only three didn't), it secured the principal execution contract in 31 and an associated contract in five others. That's an 84 per cent conversion rate, and its recent conversion record has been even higher because, when negotiating initial studies with clients, MDM now stipulates that its work will progress through to implementation.
Applying known and expected conversion rates to current studies, the order book stands at around $1bn (£519m) gross spend by clients - of which MDM takes a percentage - which underpins the next two to three years' revenues. The business is highly cash generative, posted a strong profit in its maiden accounts, and concurrently declared a first dividend.
MDM faces the challenges experienced by the entire mining industry, namely falling commodity prices and an acute shortage of skilled personnel. Yet it has still managed to grow from a team of 25 a year ago to around 120 today, and management is targeting a full strength workforce of around 150. Share options provided to employees after the May 2008 flotation have greatly helped staff retention, but the tightly held shares mean that the free float is limited and they could be hard to trade.
| MDM ENGINEERING (MDM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 171p | MARKET VALUE: | £64.1m | |
| TOUCH: | 168-174p | 12-MONTH HIGH / LOW: | 230p | 153p |
| DIVIDEND YIELD: | 6.1% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 12¢ | NET CASH: | $4.5m | |
| Year to 31 Mar | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008* | 13.6 | 4.5 | 13.0 | 4.0 |
| 2009† | 61.8 | 21.6 | 41.0 | 20.0 |
| 2010† | 77.3 | 27.1 | 51.0 | 26.0 |
| % change | +7 | +5 | +6 | +4 |
Normal market size: 2,000 Market makers: 2 *16-month period †Numis Securities estimates £1=$1.93 | ||||
