MINCON: FY Profit Hits Record €20m As Stock Level Balloons To €77m, Free Cash Flow Squeezed To €2m And Greenhammer Lifespan Set To 15 Years

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1. Mincon (MCON)

   Publication of 2022 annual report

   Here are the points of interest beyond those noted in the blog post above:
   ——————————————————————————————————————

   1) BUSINESS MODEL AND STRATEGY

   Some new explanatory text introduced for 2022:

   “Mincon’s strategy is to develop long-term sustainable competitive advantage through designing and manufacturing world class products, that will bring value for our shareholders and stakeholders. Our business development is focused on growth, creating new opportunities and continued improvement in all aspects of our business, and we can accomplish this through our strategic goals:


   • To market competitive products centred on an ethos of innovative engineering and service that is committed to adding value for our customers.
   • To seek new opportunities in new markets and to diversify our income streams to increase our global footprint.
   • To manufacture our products in strategic locations that allows a better service for our customers and reduce the requirement for trans-ocean distribution of our products.
   • To meaningful contribute to the environment, through investing in manufacturing that requires less energy, and to make positive contributions in the communities where we have businesses.”

   The group’s competitive advantage remains supported by the following commitments:

   
”We are committed to:
   
• innovative engineering and industry-leading quality;

   • the creation of new drilling products and technologies and associated intellectual property, supported, inter alia, by patents
   
• industry-leading field service delivery, and
   
• improving the skill sets of our teams” 


   The 2022 text repeats previous text explaining the need for high stock levels: i.e. the “timely supply” of products with “long manufacturing lead times” to “geographically dispersed” customers:

   “The Group manufactures and sells rock drilling consumable products, and the timely supply and service of these products is paramount to our business model.

   Since the markets that we serve across the world are geographically dispersed, and the lead times for delivery are set by customer requirements and competition to a large degree, we have built a wide network of customer service centres backed by manufacturing plants in key markets.

   We continue to review our factory operations and from time to time we relocate the manufacture or part manufacture of some products from one factory to another, in some cases, to achieve better economies of scale, and in other cases, to manufacture products with long lead times closer to their markets so that we can adapt to changing customer needs in a more timely fashion and reduce our trans-ocean freight costs. These factory reviews are ongoing as part of the company’s rolling strategic plan.”

   2) PRINCIPAL RISKS AND UNCERTAINITIES

   No changes here for 2022.

   The main shareholder dangers remain cyclical markets, economic conditions, less developed overseas legal systems, innovation failure, copycat competitors, facility failures, industry competition, currency movements, contractual arrangements, customer concentrations, pricing of raw materials, Covid-19, climate change and cyber attacks.

   Worth repeating this text that reiterates MCON’s competitive market and larger rivals:

   “The markets for the Group’s products are highly competitive in terms of pricing, product design, service and quality, the timing and development and introduction of new products, customer services and terms of financing. The Group faces intense competition from significant competitors and to a lesser extent small regional companies

   The Group is subject to competition in the markets in which it operates and some of its competitors are significantly larger and have significantly greater resources than the Group. The Group’s principal competitors are Epiroc which is headquartered in Stockholm, Sweden, with a global reach spanning more than 150 countries and Sandvik, which is also headquartered in Stockholm, Sweden, with business activities in more than 160 countries.”

   October’s warning of delayed/postponed contracts underlines the “non-recurring nature of some transactions“.

   “Contractual Arrangements:
   The Group derives some of its revenue from large transactions (which may be non-recurring in nature). Prospective sales are subject to delays or cancellations over which the Group has little, or no control and these delays could adversely affect results, The Group focuses on securing new lines of business on a regular basis to address the non-recurring nature of some transactions. ”

   At least MCON’s customer base has become more diverse. The top-ten revenue proportion has declined from 28% for 2021 to 24%:

   “Customer Concentration
:
   During 2022, the Group’s top ten customers have accounted for approximately 24% of its revenues. If, in the future, these customers fail to meet their contractual obligations, decide not to purchase the Group’s products or decide to purchase fewer products, this could disrupt the Group’s business and require it to expend time and effort to develop relationships with new customers, which could have a material adverse effect on the Group’s business, results of operations and financial condition. There can be no assurance that, even if the Group could find alternate customers, the Group could receive the same price for its products.”

   3) REGIONS

   MCON provides stats for each of its regions:

   a) Europe/Middle East: 
301 staff, 2 service centres, 4 factories = 19.4k sqm

   b) Asia Pacific: 
76 staff, 2 service centres, 1 factory = 5.5k sqm

   c) Americas: 
177 staff, 11 service centres, 2 factories = 9.6k sqm
   
d) Africa: 
79 staff, 3 service centres, 1 factory = 6.4k sqm

   Americas has 41% of sales (€70m of €170m) but only 23% of manufacturing space (9.6k sqm of 40.9k sqm).

   Maybe that earlier text — “from time to time we relocate the manufacture or part manufacture of some products… to closer to their markets so that we can adapt to changing customer needs in a more timely fashion and reduce our trans-ocean freight costs” — reflects the need for greater manufacturing in the Americas.

   Americas manufacturing facilities were 7.9k sqm for 2021, so expansion has occurred.

   4) DIRECTORS

   The 2022 report includes the bio for the non-exec appointed during March 2022, who sports a CV with useful ESG credentials:

   “PIRITA MIKKANEN
   Non-Executive Director Age 57 
Pirita is currently a Vice President of Energy with the Metsä Group, a Finnish forest industry group operating in international markets, focused on the responsible processing of northern wood into first-class products. Her team at Metsä works to ensure reliable and cost-effective energy production and leads the sustainable development of Metsä utilities. 

Prior to joining Metsä, her experience included roles with TM Systems Oy, an industrial air systems company with a focus on reducing energy usage and emissions, and serving as CEO of Lifa Air Ltd Oy, a pioneer in the development of services, machines and equipment that enable cleaner and healthier indoor air. She has acted as a fund manager and board member of climate funds. 
Pirita holds a Ph.D in Applied Physics, focusing on cleantech on pollution prevention, from the Helsinki University of Technology.”

   5) DIRECTORS’ REPORT

   No major changes in this section. MCON’s vision remains the same:

   “Mincon has a clear vision and determined focus giving priority towards:

   • Highest design specifications
   • Best manufacturing methods and processes and;

   • Delivery of superior products to our customers”

   MCON’s references to KPIs is poor. The KPI text was limited to only:

   “The Director’s review KPIs for Operating Profit, Inventory and Debtors throughout the year.”

   KPIs really should be listed with the exact ratios (i.e. how exactly is Inventory reviewed?) and management’s own calculations. MCON also reckons it monitors return on capital (see point 23).

   The director appointments show founder Patrick Purcell now having served as a non-exec since 2013 — i.e. more than the best-practice nine years. But he and his family own a collective 56% and I dare say his experience running the business from 1977 up to 2012 serves the other 44% of shareholders well.

   
The auditor has changed from KPMG to Grant Thornton

:

   “Auditor:
   Grant Thornton, Chartered Accountants continue in office in accordance with Section 383(2) of the Companies Act 2014.”

   6) CORPORATE GOVERNANCE

   No changes here for 2022.

   Director shareholdings reveal of the four non-family non-execs, one owns 47k shares, another owns 35k shares and the other two both own zero. So relatively token holdings, but they are ‘independent’:

   “The Board considers itself to be sufficiently independent. The QCA Code suggests that a board should have at least two independent non-executive Directors. One of the five non-executive directors, Mr. Patrick Purcell, is the company founder and majority shareholder through a trust. None of the rest of the Board is a significant shareholder, save through that trust for certain executive members. The Senior Independent Non-Executive director is Mr. John Doris, who is also the Chairman of the Audit Committee.

   Given the text below, I wonder if MCON is up for an appearance on Investor Meet Company?

   “The Company is also a regular presenter at invited investor events, providing an opportunity for investors to meet with representatives from the Group in a more informal setting.”

   Engagement with UK-resident investors is non-existent from what I can tell.

   7) AUDIT COMMITTEE REPORT

   All the same text for 2022 save for the appointment of Grant Thornton through an audit tender:

   “The Committee is responsible for ensuring that the Group Auditor is objective and independent. KPMG had been the Group’s Auditor from 2013 to 2021. After putting the audit to tender to three Top Ten audit firms, including the resigning auditors KPMG, the committee made the decision to appoint Grant Thornton as Group Auditor in May 2022.”

   As per 2021, 2022 witnessed three audit meetings with everyone attending and the main accounting discussion item was goodwill impairment testing.

   8) NOMINATIONS COMMITTEE REPORT

   Some new text for 2022 highlighting a new ESG committee and actions on succession planning.

   The ESG background of the aforementioned new non-exec was put to good use quite quickly:

   “The committee suggested the Board might consider creating a new subcommittee of the Board – the Environment and Sustainability Committee – and that Pirita Mikkanen would chair such a committee. The committee was officially set up and the committee terms of reference for this committee were adopted on 04th August 2022.“


   The Purcell family seems happy running MCON, with founder Patrick Purcell, age 85, remaining an influential director. But two long-time non-execs may be exiting during the next year or so:


   “Board and Executive Succession planning:
   The Committee reviewed a report from the Executive on executive succession planning. It was found that executive succession planning was appropriate and dealt satisfactorily with the Company’s requirements. 

The Committee reviewed the composition of the Board in the context of the normal terms of service of the existing directors. It was agreed to explore the possibility of extending the terms of service of Patrick Purcell in view of his singular understanding of the Company’s business. 

It was noted that the normal terms of service of Hugh McCullough and John Doris expired at the end of this year and early next year respectively. It was agreed to keep the composition of the Board under review, especially in terms of diversity of experience and expertise, gender balance and geographic diversity.”

   Non-exec John Doris will leave MCON on 1 Feb and a new non-exec — Orla O’Gorman — has now joined the board (as per the Dec 2022 RNS here).

   9) REMUNERATION COMMITTEE REPORT

   An extra primary responsibility for the committee was listed for 2022:


   “• direct and recommend for approval by the Board targets and quantum of awards issued under the long term incentive programme”

   The committee met three times and reference to a quorum implies not every member attended:

   “During 2022, the Committee met on three occasions and had a quorum of members present for all these meetings.”

   Targets for annual bonuses remained unchanged:

   “The Committee agreed a short-term incentive program for the 2022 financial year, through which the senior management team could earn up to 50% of their salary based on:
   • The achievement of budgeted profit after tax for the year (up to 40% of salary)
   • The delivery of targeted number of weeks’ inventory being carried at the end of the year (up to 7.5% of salary)
   • The delivery of a targeted number of debtors days (up to 2.5% of salary)”

   Some new text concerning the new LTIP. Targets are three-year EPS CAGR of 7% and ROCE at 13% or more (but only in the year prior to vesting:

   “Proposed Amendment for new LTIP plan to replace 2013 LTIP plan:

   The Committee discussed the proposed amendments to the 2013 LTIP plan and agreed the final instructions to be given to William Fry for the preparation of the new 2022 LTIP plan to be put before the shareholders at the AGM. The finalised amendments as summarised on pages 11 to 13 of the AGM circular to our shareholders, per the below link, were approved at the AGM.
   https://corporate.mincon.com/wp-content/uploads/2022/04/5-April-2022_Mincon-Group-plc_AGM-Notice-and-Chairmans-Letter.pdf”

   Discussion on performance conditions attaching to awards under 2022 LTIP scheme

   The Committee reviewed a document prepared by our broker and Nomad Davy setting out performance conditions utilised by some listed Irish PLCs as well as listed industry peers from different jurisdictions.
 Thereafter it was agreed that future awards would be conditional as to 50% on the achievement of EPS growth targets and 50% as to achievement on ROCE targets. The specific targets proposed and approved by the Remuneration Committee and Board are as follows:
   • EPS CAGR in excess of 7% for the three years prior to vesting
   • ROCE at or above 13% in the financial year prior to vesting”

   The 2021 annual report noted options were previously granted with a three-year EPS CAGR of 5%+CPI target. The new ROCE target seems positive, but targeting 13% ROCE only in the third year provides some leeway for lower ROCE in years one and two. ROCE is a good measure to assess management by outside shareholders given the very large inventory position held by the group.

   The basic pay for the chief exec was €200k for the third consecutive year and does not seem huge for a €20m profit business:

   

   The other executive was paid more than his brother through a €228k salary (although EUR:USD fluctuations may influence the figures).

   Founder Patrick Purcell declined his non-exec fees during 2022.

   Executive bonuses at c40% of salaries do not seem extravagant. The remuneration text does not show the directors owning any options.

   The non-execs will receive an extra €5k for 2023: 


   “It was put to the Remuneration Committee that it would be appropriate that chairpersons of all board sub committees should receive an additional €5,000 in remuneration to reflect the incremental commitment from those roles. The Committee and Board approved this proposal.“


   The board described the group’s 2022 effort as “good“:

   “The Group’s performance for 2022 was good, particularly in light of the difficulties associated with the war in Europe and the after effects of the COVID-19 pandemic as it unwinds. More insight into the challenges faces is detailed in the Chief Financial Officer’s report on pages 20 to 23.”

   10) ENVIRONMENTAL & SUSTAINABILITY COMMITTEE REPORT

   A new board committee for 2022:

   “On behalf of the Environment & Sustainability Committee and the Board, I am pleased to present the report of the Committee for the year ended 31 December 2022. This report details the Environment & Sustainability Committees responsibilities and how the Committee discharged these duties in 2022.

   Responsibilities of the Environment & Sustainability Committee:
   The role, responsibilities and authorities of the Environmental and Sustainability Committee are clearly communicated in the Committee’s Terms of Reference’ as displayed on our corporate website. The primary duties include the following:


   • Assess the effectiveness of the Group’s policies, programmes, practices and systems for: identifying, managing, and mitigating or eliminating Environmental and Sustainability
risks in connection with the Group’s operations and corporate activity; and ensuring compliance with relevant legal and regulatory requirements and industry standards and guidelines applicable to Environmental and Sustainability matters;
   • monitor and review current and emerging Environmental and Sustainability trends, relevant international standards and legislative requirements and identify how these are likely to impact on the strategy, operations, and reputation of the Group; and determine whether and how these are incorporated into or reflected in the Group’s Environmental and Sustainability policies and objectives;
   • assess the performance of the Group with regard to the impact of decisions relating to Environmental and Sustainability matters, including any social or community projects undertaken, and related actions upon employees, communities and other third parties;
   • review the quality and integrity of internal and external reporting of Environmental and Sustainability matters and performance to ensure that the Company provides appropriate information, complies with reporting obligations and good industry practice;
   • support and provide guidance to management in developing and updating policies and procedures relating to employee health and safety, environment and social responsibility; and
   • make recommendations to the Board on any of the matters listed above that the Committee considers appropriate.

   
Membership:
   Members, including the Chairman, are appointed to the Committee by the Board. The Environment & Sustainability Committee comprises Pirita Mikkanen (chair), Hugh McCullough, Paul Lynch and Patrick Purcell. Only members of the Committee and the Committee Secretary have the right to attend Committee meetings. However, other individuals, including the Chairman of the Board (where not a member of the Committee), the Group Chief Executive Officer (where not a member of the Committee), and other Mincon executives from within individual business units of the Company and its subsidiaries (the “Group”) and external advisers may be invited by the Committee Chair to attend for all or part of any meeting when considered appropriate. The Company Secretary acts as the secretary to the Committee. 


   Meetings:
   The committee shall meet at least two times in each year, and
at such other times as the Committee Chair may determine.
The committee was officially set up and the committee terms
of reference were adopted on 04th August 2022. A preliminary meeting to plan the Committee activities with the personnel responsible of ESG activities within the company was held on 7th December 2022.

   
Performance Outcome and Environment & Sustainability for 2022: 

   The very first Sustainability report of Mincon was published in August 2022. This report included the measures and initiatives to meet the company’s sustainability goals by 2040. In addition, the Board of Directors set the Net zero carbon emissions goal and formalised the Social Impact Programme. Mincon next sustainability report will be published in H2 2022.”

   The latest sustainability report was published during August 2023:
   https://corporate.mincon.com/wp-content/uploads/2023/08/FINAL_Mincon_2023-Sustainability-Report-08082023v2.pdf

   11) CORPORATE RESPONSIBILITY

   Some text revisions here, which may suggest some tweaking of ESG efforts. For example. this text from 2021…


   “Potential solutions for energy optimisation are continuously being evaluated by Mincon facilities, in conjunction with independent suppliers. Solutions under consideration include heat-treatment equipment that will help reduce reliance on natural gas as a fuel source, which will bring a commensurate reduction in carbon dioxide emissions. In areas where it is feasible, heat reclamation technologies are being considered to harvest wasted energy from the heat-treatment process and use it for heating water in facilities. Investigations are also underway to determine the possibility of installing solar panels at sites that have the available space, thus reducing the reliance on a grid that may use fossil fuels for electricity generation”

   …was replaced by this text for 2022:

   “Efficiency and sustainability is integral to our business growth strategy. We have manufacturing facilities in the same regions as customer operations in order to drastically reduce our reliance on carbon-intensive intercontinental logistics, while simultaneously improving our customer service.

   The core focus of all Mincon’s engineering efforts is to improve the energy efficiency of our products. As such, we’re also motivated to reduce the energy requirements – and related emissions – associated with the manufacturing of our products. Our engineering and environmental ethos ensures that there will be ongoing savings once products are in our customers’ hands.”

   So I am not sure whether the “heat reclamation” and “solar panels” efforts from 2021 have continued into 2022.

   The text introduced a 2040 target for net zero:

   “Our goal is to achieve net zero emissions by 2040 – one decade ahead of the 2050 deadline for EU member states to achieve carbon neutrality”

   Some text was removed for 2022, including:

   “Where possible, products are manufactured as close as possible to customer operations, thus reducing or avoiding carbon emissions for the transport of those products.”

   …and:

   “We select those suitable for employment solely based
on merit. Any job advertisements, application forms and publicity material will encourage applications from all suitable candidates and will not discriminate against any group or individual on any unjustifiable grounds. The objective is to ensure that all candidates have equality of access to all job vacancies.”

   I would like to think these removals were oversights rather than deliberate changes to current business practice.


   12) INDEPENDENT AUDITOR’S REPORT

   A new auditor brings revamped text. Grant Thornton’s evaluation of MCON’s going concern consisted of:



   “ • Gaining an understanding of the business and the associated processes of management in the going concern assessment
   • Evaluating management’s future cash flow forecasts, the process by which they were prepared, and assessed the calculations are mathematically accurate the cash flow forecast is prepared up to 31 December 2025
   • Challenging the underlying key assumptions such as expected cash inflow from product sales and cash outflow from purchases of inventory and other operating expenses
   • Regarding revenue expectations, challenging the estimates made by management by assessing whether the estimates regarding 
sales forecasts and sales prices are in line with historical revenues to date and current contracts in place
   • We also assessed a sensitivity analysis of management using the low end of revenue forecasts and accompanying key assumptions to ascertain the extent of change in those assumptions that either individually or collectively would lead to alternative conclusions
   • Making inquiries with management and reviewing the board minutes and available other available written communication in order 
to understand the future plans and to identify potential contradictory information
   • Assessing the adequacy of the disclosures with respect to the going concern assertion
”

   Full-scope audits were limited to subsidiaries representing quite a low aggregate 76% of revenue:

   “We performed and audit of the complete financial information of 10 components and performed audit procedures on specific balances for a further five components. The components we performed an audit of the complete financial information accounted for 76% of total assets, 75% of total inventories and 76% of total revenue before consolidation adjustments. The components we performed audit procedures on specific balances accounted for another 8% of total assets, 16% of total inventories and 15% of total revenue before consolidation adjustments. ”

   Not ideal that c25% of group revenue, assets etc is not assessed using “complete financial information“.

   Mind you, KPMG took a similar approach for 2021 (and did not specify the percentage of revenue etc covered by the full-scope audits):



   “Of the Group’s 42 (2020: 43) reporting components, we subjected 11 (2020: 11) to full scope audits for Group purposes. An additional 3 components (2020: 2) were subjected to account balance testing in order to provide sufficient coverage over the Group’s key financial statement lines“.

   Materiality remains at 5% of pre-tax profit at €800k.

   Key audit matters remain revenue recognition, valuation of intangibles/goodwill and investment in subsidiary undertakings (for the company accounts only). The auditor’s procedures and response did not reveal any unfavourable text.

   13) SIGNIFICANT ACCOUNTING PRINCIPLES, ACCOUNTING ESTIMATES AND JUDGEMENTS

   A fair amount of next text here, maybe due to the new auditor.

   New text includes new confirmation of one reportable segment…

   “Segment Reporting 
An operating segment is a component of the Group that engages in business activities from which it may earn revenue and incur expenses, and for which discrete financial information is available. The operating results of the operating segment is reviewed regularly by the Board of Directors, the chief operating decision maker, to make deci¬sions about allocation of resources and also to assess performance. Results are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM). Our CODM has been identified as the Board of Directors. The Group has determined that it has one reportable segment (see Note 5). The Group is managed as a single business unit that sells drilling equipment, primarily manufactured by Mincon manufacturing sites.

   …extra confirmation about government grants…

   
”Current government grants have no conditions attached

   …new confirmation about intangible-development amortisation over 15 years (see blog post above)…



   “Recognising an internally developed intangible assets post the development phase once the company has assessed the development phase is complete and the asset is ready for use. Internally generated assets have an infinite life. They will be amortised over a fifteen year period on a straight line basis. Currently there is fourteen years and nine months remaining on the amortisation.”

   …new confirmation about impairment assessments…

   
”Distinguishing the research and development phase, determining the useful life, and deciding whether the recognition requirements for the capitalisation of development costs of new projects are met all require judgement. These judgements are based on historical experience and various other factors that are believed to be reasonable under the prevailing circumstances. After capitalisation, management monitors whether the recognition requirements continue to be met and whether there are any indicators that capitalised costs may be impaired.”

   …new confirmation that financial assets are now assessed using IFRS 9…

   “Financial assets are assessed from initial recognition and at each reporting date to determine whether there is a requirement for impairment. Financial assets require there expected lifetime losses to be recognised from initial recognition. IFRS 9’s impairment requirements use forward‐looking information to recognise expected credit losses – the ‘expected credit loss (ECL) model’. Instruments within the scope of the requirements included loans and other debt‐type financial assets measured at amortised cost, trade and other receivables.”

   

…extra confirmation about share-option charges…

   “It is reversed only where entitlements do not vest because all non‐market performance conditions have not been met or where an employee in receipt of share entitlements leaves the Group before the end of the vesting period and forfeits those options in consequence.”

   …and new confirmation about climate-change matters:



   “Consistent with the prior year, as at 31 December 2022, the Group has not identified significant risks induced by climate changes that could negatively and materially affect the estimates and judgements currently used in the Group’s financial statements. Management continuously assesses the impact of climate‐related matters.”

   With revenue recognition, MCON reiterated customers can receive discounts but do not receive cash refunds:

   
”Discounts are provided from time‐to‐time to customers. Customers may be permitted to return goods where issues are identified with regard to quality of the product. Returned goods are exchanged only for new goods or a credit note. No cash refunds are offered.”

   14) COST OF SALES AND OPERATING EXPENSES

   MCON commendably continues to divulge a range of direct and indirect expenses:

   
   

   As noted in the blog post above, MCON’s gross margin has reduced over time.

   During 2022, revenue gained 18% but total (direct) cost of sales gained 21%, with raw materials up 23%, distribution costs up 26%, energy costs up 42%, maintenance of machinery up 24% and subcontracting up 31%.

   During the five years from 2017, revenue has gained 75% but cost of sales have gained 88% with raw materials up 86%, employee costs up 141%, distribution costs up 151%, energy charges up 184% and maintenance of machinery up 127%.

   Ascertaining exactly what has happened is difficult, and R&D spend of €4m underlines that not every expense has an associated source of income.

   But expenses have fundamentally risen faster than sales, which suggests some competitive faltering as MCON i) has been unable to pass on higher costs to customers, and/or ii) has been deliberately selling reduced-priced items to maintain market share.

   Neither option underpins the notion of a great ‘moat’ for the business.

   At least a lid has been kept on (indirect) operating costs, which have risen less than revenue over one year (+12% vs +18%) and five years (+39% vs +75%).

   Notable indirect-cost changes over five years are professional costs, up 115%, travel expenses, up 4% and marketing charges, up 20%.

   Extra professional costs are not surprising as adviser fees etc just seem to rise in line with greater regulation etc. Perhaps of more insight is marketing costs not following revenue higher — maybe MCON needs to promote its products more?

   Travel was €1,927k for 2022= c€3k per employee, so some workers are getting out and about.

   15) EMPLOYEE INFOMATION

   Productivity ratios improved last year but have not shown amazing progress over the longer term:

   

   Sales per employee advanced 12% to almost €272k, the highest since 2017 (€300k), while cost per employee gained 8% to almost €70k, the highest since 2019 (€70k). Staff costs as a percentage of revenue therefore decreased, from 26.6% to 25.6%, the lowest since 2017 (24.2%).

   For perspective, revenue per employee exceeded last year’s €272k during 2010, 2011, 2012, 2013, 2014 and 2017. Employee costs as a proportion of revenue was lower than last year’s 25.6% between 2010 and 2017.

   One brewing employee issue perhaps is the growing bias towards manufacturing, service and development personnel. Such workers have gained 121% in number since 2017 (from 189 to 417), versus +55% for sales and distribution staffers and +53% for general/admin bods.

   MCON’s acquisition drive to supply the full ‘drill string’ and therefore be able to engage direct with the drillers — rather than sell through intermediaries — has required extra sales/distribution people, but their proportion of the workforce is now 21% versus 26% in 2017 and 30%-plus for 2014 and 2015.

   I speculate more effort is needed to bolster the sales team and improve the efficiency of the manufacturing, which would rebalance the workforce and lead to possibly higher sales and higher margins.

   16) ACQUISITIONS & DISPOSALS

   The small €1,014k purchase of Spartan Drilling Tools came with net assets of €853k, which equates to 1.2x book and may have implications for why MCON itself does not trade all that far away from NAV (i.e. why should the stock market value MCON much above book if MCON does not value acquisitions much above book?):

   

   Talk of a loss may have explained the low purchase price:

   “The loss from the acquisition of Spartan Drilling Tools has been consolidated into the Mincon Group 2022 profit for the reporting period.”

   17) STATUTORY AND OTHER REQUIRED DISCLOSURES

   The switch from KPMG to Grant Thornton looks to have prompted lower audit fees:

   

   The €225k fee for audit services is a lowly 0.1% of revenue. Mind you, the auditors provided full-scope audits at subsidiaries representing only three-quarters of the group (see point 12).

   18) INTANGIBLE ASSETS AND GOODWILL

   The only movement of significance was the reclassification of capitalised Greenhammer development costs as an ‘internally generated intangible asset’:

   

   MCON helpfully provides a list of past acquisitions:

   

   The goodwill impairment assumptions have been tweaked, with an Ebitda margin of 20.2% a notable increase versus 16.7% and 17.8% for the prior two years:

   

   The Ebitda assumption within the 2023 report will be interesting to see after October’s profit warning.

   Headroom for the goodwill was more that double the goodwill’s €32m carrying value:

   

”The carrying amount of the CGU was determined to be lower than its fair value less costs of disposal by €52.4 million (2021: €42.9 million), giving management substantial headroom and comfort in the above stated impairment assessment.”

   The stock market is presently not assessing goodwill the same way as MCON though!

   The market cap at the recent 53p is £113m, versus a net book value of €154m = £131m at GBP:EUR 1.17. Exclude the intangibles/goodwill of €40m and net book value becomes €114m = £97m = 46p per share.

   19) PROPERTY, PLANT AND EQUIPMENT

   Always a bit confusing this note. Additions were between €10-11m for the last two years:

   

   Yet purchases of property, plant and equipment in the cash flow statement were between €7-8m.

   The differences I believe are due to the prepayment of plant and equipment:

   

   For example, I reckon MCON’s additions to property, plant and equipment for 2022 of €10,190k was made up of cash capex of €7,309k plus a transfer of c€2.9m from prepayments of plant and equipment made in prior years.

   ‘Plant and machinery prepaid and under commission’ increased by €4,071k to €9,852k for 2022, so I believe total spend on prepaid capex was €2.9m + €4,071k = c€7m.

   20) INVENTORY AND CAPITAL EQUIPMENT

   As mentioned in the blog post above, stock of €77m was huge versus revenue of €170m:

   

   Raw materials represented 21% of total stock, up from 18% the year before but within the 18-22% range seen since 2017.

   Cost of sales of €116m were 1.66x the year-average stock value of €70m, and that ratio has been very stable at 1.64x, 1.66x and 1.65x during the prior three years. So at least the stock build-up has not reflected slower stock-turn.

   Stock provisions at £128k remain small and imply little risk of product obsolescence.

   21) TRADE AND OTHER RECEIVABLES

   Nothing untoward here. The provision for impairment was 4% of gross trade receivables, and at the bottom of the 4%-15% range seen since 2015.

   

   Net trade receivables at 14% of revenue was the lowest since at least 2009. Between 2010 and 2021, the range was 16-22%.

   26% of trade receivables are past due, which is not ideal but not outside historical norms either. Prior to 2020, MCON did not report receivables not past due, but instead reported trade receivables less than 60 days due, which had been no higher than 84% of all trade receivables. Yet for 2022 the equivalent figure was 97% (and 98% for 2021 and 90% for 2020). So again, no obvious deterioration to customer credit quality.

   Note 22 gives this breakdown of trade receivables:

   

   Trade receivables as a proportion of revenue was 12% for Americas, 20% for Australasia and 15% for EMEA.

   22) TRADE CREDITORS

   No issues here. Trade creditors continue to bounce between 8% and 11% of revenue:

   

   23) CAPITAL MANAGEMENT

   Interesting text in this section that was repeated from 2021 (and before):

   “The Group’s policy is to have a strong capital base in order to maintain investor, creditor and market confidence and to sustain future development of the business. Management monitors the return on capital, as well as the level of dividends to ordinary shareholders.

The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowing and the advantages and security afforded by a sound capital position. 

The Group monitors capital using a ratio of ‘net debt’ to equity. Net debt is calculated as total liabilities less cash and cash equivalents (as shown in the statement of financial position).”

   

   Return on capital was not deemed to be a formal KPI with the Directors’ Report (see point 5). But it is being used as a LTIP target (13%) (see point 9).

   MCON’s reference to net debt seems confusing. The conventional method I have always used is cash less bank debt. Given the high levels of stock, shareholders could be excused for thinking a “strong capital base” might not be an “efficient capital base“.

   24) LOANS AND BORROWINGS

   Oh dear. This small-print has become concerning following October’s profit warning:

   “The Group has a number of bank loans and lease liabilities with a mixture of variable and fixed interest rates. The Group has not been in default on any of these debt agreements during any of the periods presented. The loans are secured against the assets for which they have been drawn down for. 
The Group has been in compliance with all debt agreements during the periods presented. The loan agreements in Ireland of €13.5 million (2020: €10.5 million) carry restrictive financial covenants including, EBITA to be no less than €18 million at end of each reporting period, interest cover to be 3:1 and to maintain a minimum cash balance of €5 million.

   Interest rates on current borrowings are at an average rate of 4.89%

   During 2022, the Group availed of the option to enter into overdraft facilities and to draw down loans of €11.5 million, €8.8 million in loans and €2.7 million in overdraft facilities.

   Loans are repayable in line with their specific terms, the Group has one bullet repayment due in 2026 of €5 million.”

   October’s update said:

   “In light of the above, looking ahead to the remainder of the year we now expect to deliver full year EBITDA of approximately €20 million”

   So, forthcoming EBITDA of €20m versus EBITA (no D!) of at least €18m to keep the bank happy. The D (depreciation) was €7m-plus for 2022 and 2021, so EBITDA of €20m translates into EBITA of €13m, which seems to break a covenant :-(

   The associated covenants relate to loans of €13.5m versus total bank loans of €30.8m. So not every loan is involved here, and the other covenants may save the day. For example, MCON had cash of €13m at the subsequent H1 2023 versus a covenant minimum of €5m.

   

   I suspect MCON and the banks will re-arrange the debts/covenants without too much heartache for shareholders, but both parties will become somewhat more circumspect with EBIT(D)A covenants and MCON will probably pay a higher rate.

   Interest on bank borrowings was stated as 4.89%, and finance costs of €870k over year-average bank borrowings of €27.1m = 3.2%.

   MCON repaid debt of €4.1m and obtained debt of €11.5m during the year, so perhaps the new loans attracted higher interest than the old loans and a higher rate of interest applied later during the year. MCON frustratingly does not disclose bank interest within its half-year statements (just ‘finance costs’, which include IFRS 16 lease interest), so bank interest during H2 cannot be compared to bank interest during H1.

   Other small-print says the bank loans attract interest with a range of 1%-9%, the higher rate of which I suspect reflects overdrafts and/or rates within some of MCON’s overseas markets.

   I anticipate MCON will have paid higher rates of interest during 2023 than 2022, and will pay even higher rates during 2024.

   25) SHARE-BASED PAYMENT

   October’s profit warning is likely to scupper the remaining options:

   

   Dilution would be less than 1% if the remaining options did convert.

   26) FINANCIAL RISK MANAGEMENT

   Contractual cash flows now take on more importance given the debt situation:

   

   Debt renewals of €11m are due in one year and €7m within 1-3 years, meaning two-thirds of borrowings could be refinanced at a higher rate in the near term.

   Also note the deferred consideration of €1.7m due within the next year or two.

   Lots of currencies are utilised at MCON. The company tries to match some same-currency income and expenses, but no hedging is employed. A line about the major income and expense currencies:

   “In 2022, 56% (2021: 54%) of Mincon’s revenue €170 million (2020: €144 million) was generated in AUD, SEK and USD. The majority of the Group’s manufacturing base has a euro, US dollar or Swedish Krona cost base.”

   27) LEASES

   Lots of tables here for IFRS 16 leases, but the upshot is a right-of-use asset (on properties) of €6.7m versus lease liabilities of €7.3m. The difference is not huge (i.e. the original lease agreement still appears reasonable value) and the bulk of the annual obligations are payable within two years (i.e. the leases are short).

   28) COMMITMENTS

   Judging by the similar level of capital contracts already agreed, capex for 2023 seems likely to match that of 2022:

   

   Maynard

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