Description

Thesis 

Mader Group (MAD AU) is a profitable growth company trading at an attractive valuation. Over the past five years, revenue and net income have grown organically at a cagr of 37% and 46%. The company has a June fiscal year end, and the stock trades at 15x my estimate of  2023 EPS and 17x consensus. There are two analysts covering the stock, and they assume that top line growth fades to 18% in 2023  and 12% in 2024.  Given the scale of the market opportunity and the company’s leadership position, I believe revenue could compound at 15-25% for the next ten years,  growing to  4x current levels. The main investment risk  is execution. This is a people intensive business. A strong and effective corporate culture has enabled the business to scale and flourish. The founder and insiders’ interests are aligned as they continue to  own 75% of the shares outstanding. 

Company Background

Mader Group (MAD AU) is a leading provider of maintenance services of mobile and fixed equipment to the  mining and energy sectors. The company services 240+ customers accross 370+ mine sites with a skilled workforce of 1,750+ employees. The company was founded by Luke Mader, the current chairman of the board and owner of 55% of the shares, in 2009 in Western Australia   with a single workshop. It listed on the ASX in 2019. The company  derives 90% of its revenues from Australia. It expanded operations organically  to the US  in 2018 and to Canada in 2022. North America grew revenue at 66% in the 1H22. It represents the most attractive growth area for the company. 

Business Description 

Mining operations are capital intensive. They require heavy machinery to extract, handle, and process large quantities of “earth."  Examples of equipment  include, hauling equipment, grinders, crushers, and excavators. The vast majority of this equipment is powered  diesel engines. Large dealers that  represent the large OEM brands (Caterpillar, Komatsu, Hitachi, Volve SE, etc),  sell the equipment, finance the equipment and  provide parts and  maintenance services under warranty agreements.  

The typical warranty period covers the first 5,000 hours of an equipment’s life, but the useful life of the equipment can extend for multiples of the OEM warranty period. Luke Mader, while working as a mechanic for a large Caterpillar dealership in Western Australia, recognized the opportunity to provide a better service for off-warranty equipment. Dealers make most of their money from parts and equipment sales.  Mader mechanics are, on average, 30% more efficient than those working at a traditional dealership.  Mader is able to price slightly below the dealerships’ pricing umbrellas.. Twenty two years since the company’s launch,  Mader Group has a presence at 65% of Australia’s mining sites and continues to expand its scope of services and gain share of wallet. 

Company Culture

This is an asset light business whose success is entirely dependent on management’s  ability to attract, retain, and efficiently manage a specialized workforce.  The company generated AUD 19 million of net income in 2021 with net fixed assets of AUD 40 million, mostly a fleet of 800+ specialized pickup trucks.The success of Mader Group is highly dependent on the culture of excellence and mutual respect which is evident across the organization.  The company has invested in developing its own internal management systems. It prides itself on its low employee turnover  and impressive safety record. Top management and the Chairman/Founder, make an effort to personally meet every single employee out of a workforce of 1,750 plus. 

Big emphasis is placed on training, work  flexibility,  and internal  opportunities for professional development. The company is organized around coordinators which report to regional managers. Coordinators manage 40-50 employees and typically rise through the company ranks. Coordinators and regional managers are incentivized on a combination of: employee turnover, safety record, growth and profitability. 

In 2021 Mader Group was awarded Employer of the Year by RISE Business Awards, Training Excellence Award by Australian Business Awards, finalist for Contract Miner of the Year by the Australian Mining Prospect Awards, and Most Trusted Mining and Civil Contractor by APAC Insider. It is telling that Mader’s largest competitor, founded at around the same time twenty years ago, is one tenth of its size. 

Business Economics  

Mader Group has grown profitably while generating attractive returns on capital and stable margins. It has also been able to fund its growth from operating cash flow.   The Company’s growth investment requirements are support vehicles and working capital. Because customers pay  every sixty days and salaries are paid  every two weeks, Mader invests  roughly 15 cents in working capital for every additional dollar of revenue. 

Payroll comprises the vast majority of cost of goods sold which itself represents 80% of revenue.   Half of the revenue comes from multi year master framework agreements and the other half comes from “reactive service delivery,” which is somewhat recurring in nature given the nature of the mining industry. Machinery breaks down and needs to be repaired in order to keep production going and avoid greater losses. . The company does not provide pricing guarantees to customers and retains the ability to pass on wage increases. 

Growth Prospects 

In 1H22, the Australian operations recorded revenue growth of 26%. The company, for the first decade, focused almost exclusively on mobile plant maintenance,  fixing diesel engines for mining trucks. Heavy duty diesel mechanics still make up 60% of the workforce. However, the company has been  expanding rapidly to adjacent areas such as rail maintenance, excavators, marine and power generation, infrastructure maintenance, electrical maintenance. Management believes that it has only scratched the surface in terms of share of wallet and can continue growing at 20% in Australia. 

The more exciting long term growth opportunity is expansion in North America. The mining sector in the US and  Canada combined is roughly 3x the size of the Australian mining sector in terms of  tonnes of earth moved. Mader Group thinks the economics of the North American market are more attractive than those of the Australian market because the heavy equipment dealers have historically exerted greater pricing power. This is evident in the performance metrics of the three year old  North American operations which  grew revenue 66% in 1H22. Despite their much smaller size and earlier stage,North American operations have EBITDA margins of 20%, twice those of Australia!

Low expectations 

The company is covered by two analysts. They expect revenue growth to slow down in the next two years to the low teens.  I believe that revenue and eps growth could accelerate, driven by the vast and hugely profitable North American market. I believe that 15x June 2023 EPS is not demanding multiple for a highly profitable, conservatively financed,  self funding, cash generative, dividend paying company that can grow at 15-25% for the foreseeable future. 

Risks 

Cyclicality risk

I do not believe that cyclicality is a big risk.. Although the prices of commodities are highly cyclical, production volumes are not, and maintenance expenditures are closely tied to production volumes.  Even during periods of low prices, production volumes tend to hold up because existing mines continue to produce so long as they can cover their marginal cash cost of production.  Furthermore, during downturns, small  miners tend to reduce fixed costs by outsourcing services such as  maintenance. 

Execution risk and risk of short term disappointments 

In my opinion, the biggest risk is execution risk. Management has done a good job of growing in Australia, but will it be able to scale in North America? When a company is growing at such a  rapid pace, there will always be disappointments along the way. I believe that in the near term, the company is performing ahead of expectations and those expectations are relatively low. 

Conclusion

I think Mader Group stock  at 15x current year earnings is an attractive investment.  I believe that revenue and eps can grow at 15-20% rate for the next decade without the need for financing or acquisitions. I think the stock will compound at the rate of growth and will likely experience periods of multiple expansion which could drive even higher returns in the near term. Given the reasonable valuation, the well capitalized balance sheet, and the solid, well established and still growing Australian business, II do not see a lot of risk of a permanent loss of capital over a 2-3 year time frame.

Catalyst

Execution and greater awareness of the businness' potential.