What is MacMahon worth?
On the Sky Business Channel with Nina May recently, a caller rang in and asked for my valuation of MacMahon Holdings Limited (ASX Code: MAH).
I ran the numbers and received mixed signals. The return on equity of the company has only exceeded 21% in one year – 2008. In 2006 returns on equity were less than 1% and since 2002 ROE with these two years removed, has averaged just under 14%. This is not a return on equity to get excited about. Disappointingly, the company has also raised $216 million from shareholders, and diluted them by increasing the shares on issue by more than 300% since 2000.
The decline in borrowings between 2007 and today from $169 million to $111 is initially encouraging, as is the reduction of retained losses by $86 million since 2002, but since 2007 the company has raised $78 million through equity raisings. Arguably it is not the performance of the business that is reducing the debt burden and the retained losses simultaneously, but the performance of the company’s PR team. Finally, at a price of 59 cents, all the value investing margin of safety is gone. Indeed the price today is about my value for this company two years out. I cannot predict what the share price will do – it may double from here, but on present performance expectations, such a move would not be justified.
Posted Roger Montgomery, 23 December 2009
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