MCR.V - Macro Enterprises

[jwfm1985]

doubled down today. Now under 4X both TTM and 2014 projected EBITDA, 2.7X 2015 projected EBITDA

[jwfm1985]

Anyone buying here? I'm wondering if Q2 was leaked. Tis thing is dropping 4-5% daily.

 

MCR has traded in-line with most the BC Nat gas companies, which have taken a major hit in the last couple weeks with weak prices. Expecting this quarter to be tough though. Should a be a good buying opportunity...

[jwfm1985]

At today's closing price it's trading at ~3.5x expected 2014 EBITDA. I really don't think the market understands the impact of switching from fixed-price to time-and-material contracts on their margins going forward (i.e. Q1/2 margins are not a reflection of the new status-quo)...

[Guest 50centdollars]

PRESS RELEASE FROM MARKETWIRE

Macro Enterprises Inc. Announces 2014 Second Quarter Results

Wednesday, August 27, 2014

 

Macro Enterprises Inc. Announces 2014 Second Quarter Results

19:16 EDT Wednesday, August 27, 2014

FORT ST. JOHN, BRITISH COLUMBIA--(Marketwired - Aug. 27, 2014) - Macro Enterprises Inc. (TSX VENTURE:MCR) -

 

Summary of financial results

(thousands of dollars except per share amounts)

Three months ended

June 30 Six months ended

June 30

2014 2013 2014 2013

(unaudited)

Revenue $ 36,698 $ 37,282 $ 124,477 $ 97,404

EBITDA 1 2,726 9,814 7,830 24,835

Net earnings 495 5,710 2,648 15,395

Net earnings per share $ 0.01 $ 0.21 $ 0.08 $ 0.61

Weighted average common shares outstanding (thousands)

30,007

25,120

Note 1 - References to EBITDA are to net income from continuing operations before interest, taxes, amortization and impairment charge. EBITDA is not an earnings measure recognized by International Financial Reporting Standards ("IFRS") and does not have a standardized meaning prescribed by IFRS. Management believes that EBITDA is an appropriate measure in evaluating the Company's performance. Readers are cautioned that EBITDA should not be construed as an alternative to net income (as determined under IFRS) as an indicator of financial performance or to cash flow from operating activities (as determined under IFRS) as a measure of liquidity and cash flow. The Company's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Company's EBITDA may not be comparable to similar measures used by other issuers.

 

Highlights

 

The Company continues to build on and maintains a strong working capital position increasing it from $40.3 million as at December 31, 2013 to $41.4 million as at June 30, 2014

 

The Company added a net $4.7 million of new property, plant and equipment. In addition, the Company obtained a 3 rd party valuation of its existing fleet of equipment that shows a surplus in excess of $30 million over book value

 

The Company reduced total long-term debt by $1.5m from year end to $18.8 million as at June 30, 2014

 

Revenues were comparable to 2013 Q2 revenues, however, operating margins decreased as a result of the absorption of a loss from a strategic job

 

Second quarter results

 

Consolidated revenue was $36.7 million compared to $37.3 million in the second quarter last year. Most of the revenue in the quarter was derived from two larger facility jobs, the completion of a big inch pipeline project and a series of integrity digs for one of the Company's key customers. In the second quarter last year, the Company worked on three larger facility and pipeline projects as well as maintenance and pipeline integrity work for two other customers.

 

Operating expenses were $31.9 million or 87% of revenue compared to $25.5 million or 68% of revenue in the second quarter last year. The decline in operating margins as reported was the result of carry over completion work performed on a large pipeline project in Fort McMurray which had commenced in December 2013 and was materially accounted for in the first quarter 2014. The increased costs have resulted in lower than anticipated profits for the Company. For strategic reasons, Macro originally bid this job at low margins but unanticipated problems with the project resulted in a final loss of $8.0 million dollars of which an addition $1.1 million dollars was accounted for this quarter completing and demobilizing the job. Total operating expenditures incurred in the second quarter of 2014 for a strategic job amounted to $4.9 million dollars compared to $3.8 million dollars recognized as revenue.

 

Macro has entered into discussions with the pipeline operator requesting additional compensation. Additional compensation, if any, will be recorded when such further compensation has been formally agreed to.

 

During the prior year three month period ended June 30th the Company realized improved bid margins and a greater percentage of non-fixed price work that resulted in improved operating margins compared to prior periods.

 

General and administrative expenses were $2.4 million, up from $2.2 million last year, but consistent with levels of the most recent quarter. Costs were higher compared to prior year as a result of increased professional fees and additional staff costs associated with the increased work activity. As part of the Company's strategy to pursue large scale projects, it incurred significant expenditures in connection with the bid process. It anticipates that this will continue. In addition, the Company has engaged the advisory services of an investment bank to assist in evaluating its financial requirements for large scale projects. In this regard, the Company also commissioned an independent valuation of its existing fleet of equipment which provided for a fair market value in excess of $82 million before fiscal 2014 additions.

 

Total depreciation expense of $1.8 million was comparable to prior year period reflecting the additional assets obtained in the November 2012 acquisition.

 

Interest expense of $0.2 million was approximately $0.1 million lower than the second quarter last year as a result of improved interest rates and a decrease in total amount of debt outstanding.

 

Income tax expense in the quarter of $0.2 million was in line with current enacted tax rates of approximately 26.6%.

 

Net income was $0.5 million ($0.01 per share) compared to $5.7 million ($0.21 per share). The decrease in net income is a result of increased operating costs being incurred during the quarter.

 

OUTLOOK

 

Activity in the oil and gas industry in western Canada remains very active. Macro is strategically pursuing multiple large scale potential projects that combine commercial, logistic, and time scheduled criteria that are conducive to minimizing risk and maximizing the synergies of pipeline and facility construction. Macro is continuing to see benefits from numerous pipeline integrity and facility projects derived from its multiple major clients. However, primarily as a result of customer project scheduling delays within the industry, the Company is expecting revenues in the third quarter of fiscal 2014 to be below those recorded in third quarter of fiscal 2013 with total revenues being recognized for the nine months ended September 30, 2014 to be slightly less than prior year. With the completion of the strategic pipeline project in the second quarter, the Company is targeting margins more in line with historical averages and as such expects to see significant financial improvements to its operations over the balance of fiscal 2014.

 

In addition, the Company is seeking out pipeline construction contracts in connection with the Liquefied Natural Gas (LNG) projects being planned on the west coast of British Columbia, an industry that is anticipated to bring substantial economic activity to British Columbia over the next 30 years. Macro has completed bid processes and has entered into discussions with several of the LNG project owners regarding future pipeline and facilities construction.

 

Macro's core business is providing pipeline and facilities construction and maintenance services to major companies in the oil and gas industry. The Company's corporate office is in Fort St. John, British Columbia. Its shares are listed on the TSX Venture Exchange under the symbol MCR. Information on the Company's principal operating unit, Macro Industries Inc., can be found at www.macroindustries.ca.

[yadayada]

seems like downside here is very limited, and earnings could very well pick up again? Liquidation value is probably somewhere between 70-90 million$?

[Guest 50centdollars]

I have bids in to buy. Fixed contracts are over and profit margins should bounce back to more normal levels.

[yadayada]

if you like this one you will like enterprise as well. Same region, same cheapness, but better business. And less dependant on LNG. There is a thread here somewhere on it.

[Guest 50centdollars]

To be honest I dont really like enterprise group. I own MCR and Aveda (AVE). I think Aveda is the best one. The have a strong mgmt team and the majority of their revenues are from the US.

[Patmo]

Man, I'm jealous of the people that can purchase this at current prices. Macro is gearing up for all sorts of growth opportunities, yet it's trading at an headscratching discount to not only current earning power, but to last 3 years avg as well. I was all giddy at $4.5, imagine how good people that buy it at $3 have it. You now have additional protection in case mcr's current earning power is at cycle peak.

 

Looking back I think I got a little too excited and bought too early, I put an $8 to 10 value on it (based on current earning power and excluding large growth opportunities, LNG or otherwise) and started buying at $5, averaging down to $4.5, justifying it as a $10 company due to growth opportunities when I could have just let the knife fall for the last quarter and bought at around $3.6, below the lower range of my estimate. A good lesson in patience, but I'm quite comfortable with this investment and very confident in the outcome.

[jwfm1985]

Man, I'm jealous of the people that can purchase this at current prices. Macro is gearing up for all sorts of growth opportunities, yet it's trading at an headscratching discount to not only current earning power, but to last 3 years avg as well. I was all giddy at $4.5, imagine how good people that buy it at $3 have it. You now have additional protection in case mcr's current earning power is at cycle peak.

 

Looking back I think I got a little too excited and bought too early, I put an $8 to 10 value on it (based on current earning power and excluding large growth opportunities, LNG or otherwise) and started buying at $5, averaging down to $4.5, justifying it as a $10 company due to growth opportunities when I could have just let the knife fall for the last quarter and bought at around $3.6, below the lower range of my estimate. A good lesson in patience, but I'm quite comfortable with this investment and very confident in the outcome.

 

I feel your pain, but bought some more yesterday to average the cost down to just about $4. Seemed like there is some light at the end of the tunnel based on the conference call yesterday.

[yadayada]

seems weird it trades down so much. Book value is protected. Id say that there is no more then about 30-40% downside here in worst case with so many projects in back log. But liquidation seems unlikely right now anyway.  And huge upside of several 100%. So management took one risk and it did not work out and everyone dumps the shares? Seems like really short term thinking going on here. Still im only making it a 5% position. Probably will kick myself later this year for that :D .

[Laxputs]

Can't find the conference call on their website or Seeking Alpha. Anyone have a link, please? TIA.

 

[Guest 50centdollars]

Can't find the conference call on their website or Seeking Alpha. Anyone have a link, please? TIA.

 

 

i dont think there is any replays for the CC. We will have to wait until the company posts it on their site.

[Guest 50centdollars]

here you go: http://www.macroenterprises.ca/investor_info/webcasts.php

[jwfm1985]

To be honest I dont really like enterprise group. I own MCR and Aveda (AVE). I think Aveda is the best one. The have a strong mgmt team and the majority of their revenues are from the US.

 

Just from a quick glance, I like Aveda as well, but doesn't seem silly cheap like MCR at these levels. What are your thoughts on the valuation? One other key point with MCR is that I think they have a much more scalable platform to take on large contracts (relative to some of the other capex heavy oilfield services companies, i.e. Entrec, Aveda, etc) - they've already made a massive investment in equipment (and to a lesser extent people) to bid on and hopefully win larger contracts. Eventually, if things go as planned, they'll turn into a nice cash cow...

[Guest 50centdollars]

To be honest I dont really like enterprise group. I own MCR and Aveda (AVE). I think Aveda is the best one. The have a strong mgmt team and the majority of their revenues are from the US.

 

Just from a quick glance, I like Aveda as well, but doesn't seem silly cheap like MCR at these levels. What are your thoughts on the valuation? One other key point with MCR is that I think they have a much more scalable platform to take on large contracts (relative to some of the other capex heavy oilfield services companies, i.e. Entrec, Aveda, etc) - they've already made a massive investment in equipment (and to a lesser extent people) to bid on and hopefully win larger contracts. Eventually, if things go as planned, they'll turn into a nice cash cow...

 

I dont have Aveda's numbers infront of me at this moment. Last time I looked at it was a few months back and it was trading at 1.5 times BV. My thomson shows a P/E of 12. It is probably the most expensive out of MCR, E, PRW, ENT but I like their management the most. I think around 65-70% of the revenues are from the US which I like. I really like David Werklund, chairman of Aveda. He started a similar company in the 80's and sold it 20 years later for around 4 billion I think it was. So I'm betting he does the same here.

[yadayada]

btw why don't you like enterprise? they have equipment that little other firms have and are overbooked and are basicly trading at 4-5x 2015 PE with little debt and competent management.

[Laxputs]

How much of their revenue is consistent and recurring? Are there long-term contracts in their revenue stream? Is the potential LNG boom an option for growth or somewhat necessary in the thesis? I would not be comfortable with a downside "protected" by the value of their assets when the value of their assets is tied to how well they can extract earnings from their market.

 

TIA

[yadayada]

They bid on a few large contracts. The risk is that costs skyrocket in one of those few projects and they go bust. Not that demand for infrastructure will dry up. I think this risk is more mitigated in the larger companies. But they have very little debt. I guess company would not be liquidated in that case,  just not earn a lot or possibly dillute. And it would probably mean management is not very competent at extracting value from their machines. My guess is, one or two good quarters, and their lumpy receivables going down and turned into cash and this thing rerates big time. They basicly only need like 2-3 good years and you already make good money on this stock. That would be 60-90 million in cash on top of current assets and equipment.

 

If they managed to grow and utilize most of their equipment then this is a homerun. It seems they  bought that company last year or so? And they did not utilize most of that equipment yet.

 

Also after finishing a few more contracts they get more maintenance work, and that seems to be lower risk higher margin work.

[Laxputs]

Macro is now my 6th holding.

 

Hard to imagine losing money in this company and 2x share price in 8 months is my base case which does not need revenue growth/LNG boom. If there was revenue growth (there's been 34% per year over the last 5 years) and historic margins around 23% with a 10x multiple, this stock could easily be worth 3x the price in a year.

 

-Their fleet is worth around 90mm. And the equipment is bulldozers, sidebooms, heavy trucks, etc., applicable to many industries; so there actually is asset protection.

-CEO owns 36%.

-Acquired NAEP assets in 2012 that have already been independently valued higher than the price they paid for them.

-Assets can support 50% higher revenue.

-Trading around 3x normalized EBITDA with very low debt burden/10x interest coverage.

 

Risks:

-Management took a deal with low margins to increase customer base (and ended up losing 8mm on that 19mm revenue low margin contract). So even though management seems plain-spoken and honest, there is a chance they are not excellent at running their business. (This could be countered by the fact they have growth their business very well in a short period and seemed to have made a good acquisition of the NAEP assets. So this flub may be an anomaly).

-Top 4 customers account for 70% of business

-Could potentially be some key person risk if any of their contracts are related to who the CEO, Frank Miles, knows in the industry.

 

Revenue is likely going to grow over the next few years (as it has done immensely in the recent few years). Gross margins will approximate past. Even if revenue were to somehow get cut in half, a 10x multiple on their ~10% net margins is close to today's price.

 

Gogogo.

 

 

 

[Fat Pitch]

This appears to be an interesting company, but I have a question about the AR. Just by glancing at the trade receivables table it suggests that their clients are squeezing them. This probably explains why the stock is so cheap. Does anyone know if this is standard practice in the industry?

 

Edit: I just looked at Q1 and saw they were able to convert some of that amount to cash in Q2. Doesn't look that bad, but I would like to see more of it turn into cash quicker.

[jwfm1985]

This appears to be an interesting company, but I have a question about the AR. Just by glancing at the trade receivables table it suggests that their clients are squeezing them. This probably explains why the stock is so cheap. Does anyone know if this is standard practice in the industry?

 

Edit: I just looked at Q1 and saw they were able to convert some of that amount to cash in Q2. Doesn't look that bad, but I would like to see more of it turn into cash quicker.

 

This is the unfortunate reality of the construction business and not likely to change. Thankfully they improved on their AR position from Q1

[jwfm1985]

This appears to be an interesting company, but I have a question about the AR. Just by glancing at the trade receivables table it suggests that their clients are squeezing them. This probably explains why the stock is so cheap. Does anyone know if this is standard practice in the industry?

 

Edit: I just looked at Q1 and saw they were able to convert some of that amount to cash in Q2. Doesn't look that bad, but I would like to see more of it turn into cash quicker.

 

Also, there are a few reasons this stock is cheap, but I'd say a long collection period isn't really one of them. The vast majority of their clients are blue chip companies with very low credit risk. The 10-15% holdbacks go both ways in that they stretch out your AR and reduce cash flow, but provide some assurance that you'll get paid if projects go sideways.

[noxalley]

Does this company have a durable competitive advantage of any kind? I don't see one. What is to stop its returns on capital from declining to its cost of capital over the next 5-10 years?

[Laxputs]

Isn't a durable competitive advantage extremely rare?  Don't 99% of businesses not have one? Its margins had an extremely large one time drop. Up until the flub on the Fort McMurray project GM's were consistently 20-30%. Management is estimating 23%. Revenue is very likely going higher. But if revenues are stagnant and GM's are over 20%, it doubles in less than a year.  A potential LNG boom is a free-roll. There is also asset protection, though extremely unlikely that comes into play.