Centralized Processing Hubs And Longer Haulage Distances Will Support Stronger Long-Term Outlook

Catalysts

About MLG Oz

MLG Oz provides integrated mining services that support critical processing infrastructure for gold and iron ore producers across Western Australia.

What are the underlying business or industry changes driving this perspective?

• Ongoing build out of centralized processing hubs fed by satellite operations is structurally increasing haul distances and volumes for MLG Oz, which should underpin steady revenue growth and higher asset utilization over the medium term.
• Further capital investment by gold and iron ore majors into processing infrastructure that requires MLG Oz haulage, crushing and screening, and site services is likely to deepen contract scopes and extend contract lives, supporting earnings visibility and annuity style cash flows.
• Expansion of MLG Oz exposure beyond gold into Tier 1 iron ore miners such as Rio Tinto and Fortescue diversifies commodity risk while tapping long life, low cost assets, which should smooth revenue and support more stable net margins through commodity cycles.
• Disciplined fleet deployment, portfolio repricing, and technology driven productivity gains are already lifting EBITDA margins toward the mid teens, and further optimization of lower returning contracts could drive an improving return on capital and earnings growth.
• Transition from growth heavy to more sustaining CapEx as recent fleet additions are fully deployed, combined with a degeared balance sheet and high cash conversion, positions MLG Oz to expand profit share and higher value infrastructure participation, enhancing future earnings and free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming MLG Oz's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 3.7% in 3 years time.
• Analysts expect earnings to reach A$24.0 million (and earnings per share of A$0.16) by about December 2028, up from A$12.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, down from 11.7x today. This future PE is lower than the current PE for the AU Metals and Mining industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategy is explicitly built around expanding centralized processing hubs and ever increasing haulage distances. If this capex cycle in gold and iron ore infrastructure persists, the structural uplift in tonnes hauled and services provided could drive revenue materially higher over time. This would contradict expectations of a flat share price through stronger top line growth and operating leverage flowing into earnings.
• Management is targeting a step up in return on capital from just over 10% toward the late teens or early twenties, supported by technology driven productivity gains, contract repricing and better fleet utilization. If they succeed, the resulting margin expansion and higher capital efficiency could push net margins and earnings above current consensus, supporting a re rating in the valuation multiple.
• MLG Oz is transitioning from a period of heavy growth capex to a more balanced mix with increasing sustaining capex while already demonstrating strong cash conversion and rapid debt paydown. This combination of growing free cash flow, lower gearing and higher net tangible assets per share could lead investors to assign a higher price to book and price to cash flow multiple than implied by a flat share price.
• The customer base is anchored by Tier 1 miners and long life processing hubs that tend to run through commodity price cycles, and management is now looking to move up the value chain into profit share and infrastructure participation. If these long duration, higher value arrangements are secured, the resulting annuity like earnings growth and improved earnings quality could support a rising earnings multiple and higher absolute earnings.
• Exposure is currently heavily skewed to gold with growing contributions from Tier 1 iron ore projects such as Rio Tinto and Fortescue. If commodity prices in these markets remain robust while volumes ramp on new contracts and hub and spoke expansions, the cyclical and secular tailwinds together could drive faster than expected revenue growth and stronger EBITDA margins, improving earnings and undermining the thesis that the share price will stay roughly unchanged.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$1.0 for MLG Oz based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$647.4 million, earnings will come to A$24.0 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of A$0.92, the analyst price target of A$1.0 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.