This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
For longer-term followers of my blog, you will notice that I tend to analyse businesses that are priced on a reasonable valuation (i.e. today’s price makes sense) than businesses where you need to assume that the business grows simply to support the price today.
In this series, I address; two very different companies; MAAS (today's article) and Dalrymple Bay Infrastructure (tomorrow's article)
MAAS – a phenomenal founder; but what are you paying for it?
If you are yet to find the time, it is worth listening to the podcast on MAAS. There is no refuting that this is an incredible business and an even more impressive leader. All of this aside, the question we have to ask ourselves is;
Could the business survive under other management?
Is today's valuation reasonable for this business?
Disregarding price; what are the growth prospects for MAAS?
For those who are yet to hear of MAAS, they provide construction materials, equipment, and services for civil, infrastructure, and mining end markets in Australia and internationally.
#1 - in terms of MAAS' business model they are great operators in regional equipment hire and commercial real estate where ultimately there is not a meaningful moat.
For example, I would not consider most REITs or Seven Group to have a meaningful moat
#2 - For valuation, this is where everything comes undone for MAAS:
I consider the cap rates for semi-regional commercial property to be inflated (vs. historical levels) and there is more risk to the downside on their longer-life projects compared to short projects (e.g. generic warehouses)
Overall civil/construction levels are buoyed by government projects; which will NOT fall away however it will likely ebb/flow with the whim of the government. This is similar to what happened with the NBN roll-out by Service Stream
MAAS has a strategy to use debt headroom to conduct further M&A activity coupled with additional equity raising. I envisage shares outstanding will expand by 4% p.a. (best case) and 7% p.a. (worst case). Whilst these M&A deals should be accretive, I generally shy away from baking in any value for future M&A
#3 - Offsetting my bearish comments about valuation; there are growth factors to get excited about with MAAS
Regional areas, despite my comments about cap rates above, do generate stable levels of population growth (driving land values below)
Vertical integration (e.g. owning land, building products and equipment) and their commitment to regional Australia provides them with a competitive advantage over other typical developers however I would not say this is an enduring advantage
Wes Maas has got an impressive ability to deploy capital
MAAS – Forget about the $/share; what drives this business
The punchline of my SOTP valuation is quite boring; I think the company is fully valued today with little upside in the next 12 months (unless you take a punt on their M&A pipeline). The more important takeaway is understanding what drives MAAS' returns
The biggest drivers for valuation are:
Residential
Residential house price appreciation driving margins in FY23/24
Product blend: ultimately MAAS generates better margin on pure house sales, however, demand/property-level factors impact whether they are sold as land
Commercial
My background in commercial real estate means I generally get into the weeds of individual commercial developments. However, MAAS' portfolio which generally has diverse/smaller projects and various product types (childcare, highrise, serviced apartments and industrial)
As such, I have not sensitised the passing yield or construction time frame but instead the market cap rate for valuation. Amongst brokers, the current yield spread is between 5% (bullish) and 7% (bearish).
Note: There is downside risk on interest rates and cap rates, however, this rental stream will be an inflation hedge
Non-Property Assets - Materials
MAAS uses >25% of its building material in residential homes so it is positively exposed to housing cycles, however, the bigger driver is infrastructure projects
The Materials business (c.18x) attracts a higher multiple due to their margins and the planning/capital intensive nature of setting up quarries
MAAS has 23 quarries; with 14 having planning for new development and some drivers are set out below
Non-Property Assets - Civil construction
The contract hire/civil construction business is generally more clumpy in nature than the materials business. MAAS has secured 95% of its FY22 order book with Snowy Hydro 2.0, QGC and Gympie Bypass
For underground services; I have not gone into great detail because it is not a real contributor to earnings but it has greater retention
Total valuation - totalling $5/share vs. current $5.3/share
Conclusion
Overall, MAAS is a fully-priced cyclical which has a long-term tailwind of infrastructure projects in regional east-coast Australia
Their Vietnam manufacturing has now fully recovered from COVID-19 disruption
Their vertical integration is an advantage from a price-point perspective, however, ultimately it is not a 'moat' for MAAS and future price appreciation is subject to both M&A activity and the housing/infra market growing (which is generally at least partially cyclical, yet trending upward)
Whilst I do not consider MAAS to be purely cyclical; always remember Peter Lynch's quote on cyclicals
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