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

24 June 2023
By Maynard Paton

FY 2022 results summary for Mincon (MCON):

• A positive performance buoyed by healthy post-pandemic orders, showing revenue up 18% (to €170m) and profit up 9% (to €20m) to set new FY records.

• Bumper construction income, greater direct sales and increased US revenue counterbalanced weaker mining activity in Europe and Australia.

• Rig problems have beset early revenue from the “transformational” Greenhammer system, which management now believes has a 15-year useful life.

• A €14m working-capital investment pushed stock levels to a huge €77m, squeezed free cash flow to only €2m and raised questions about the debt-funded dividend.

• MCON’s “superior technical and innovative technology” is still to translate into superior financials, with obvious evidence of smart capital-allocation decisions remaining elusive. I continue to hold.

Contents

• News links, share data and disclosure
• Why I own MCON
• Results summary
• Revenue, profit and dividend
• Sector divisions
• Greenhammer
• Subsea drilling and large-diameter hammer drilling
• Financials: Margin
• Financials: Stock
• Financials: Cash flow and net debt
• Financials: Return on equity and revenue per employee
• Valuation

News links, share data and disclosure

News: Annual results and presentation for the twelve months to 31 December 2022 published 13 March 2023 and Q1 trading update published 09 May 2023.

Share price: 90p
Share count: 212,472,413
Market capitalisation: £191m

Disclosure: Maynard owns shares in Mincon. This blog post contains SharePad affiliate links.

Why I own MCON

• Designs and manufactures industrial drills, with sales supported by established reputation, engineering excellence, technical innovation and first-class service.

• Boasts veteran family management with 46-year tenure, 56%/£108m shareholding and very long-term perspective.

• Offers higher earnings potential through increased construction-related revenue, further direct sales, greater US custom plus “transformational” new products.

Further reading: My MCON Buy report | All my MCON posts | MCON website

Results summary

Revenue, profit and dividend 

• H1 revenue up 27% and H1 profit up 18% followed by an upbeat November Q3 trading update… 

“The very strong revenue growth reported in the Group’s half year results to 30 June 2022 has continued in the past quarter, and revenues for the first nine months are 25% ahead of 2021. Our revenue growth has been mostly organic, supported by currency tailwinds, price increases and some contribution from acquisitions.”

• …had already indicated this FY 2022 statement would unveil positive progress.

• Both revenue and profit in fact registered new FY records. 

• FY revenue gained 18% to €170m while FY operating profit advanced 9% to almost €20 million:

• H2 growth was not as strong as H1 growth, as pandemic interruptions experienced during the comparable FY 2021 receded throughout FY 2022. 

• H2 revenue climbed 10%, which lifted H2 profit by only 3%.

• MCON said the “vast majority” of growth had been organic, with favourable currency movements and small acquisitions complementing the performance.

• MCON confirmed sales uplifts were experienced throughout the group, but profit was restrained by “inflationary factors“:

“Revenue growth was a mix of growth across our three industries, with construction, particularly in North America, being the standout performance. However, this growth did not increase our profits significantly as inflationary factors in manufacturing held our margin back, though we did introduce price increases to offset these effects.” 

• The “inflationary factors” were not surprising:

“Our manufacturing centralised in Europe did leave us exposed to higher manufacturing inflation in the first half of 2022. The impact was mostly through increased energy costs, which was more acute in Europe. Increased energy costs have considerable impacts on the manufacture of steel products. 

Other high inflationary manufacturing elements were in raw material costs, employee, subcontracting and freight costs. We also experienced increased costs in the procurement of non-Mincon manufactured product.”

• A notable comment concerned freight conditions, which are starting to improve and may reduce MCON’s elevated stock position during the current year:

“Freight conditions did start to improve toward the end of the year, and this has encouraged us to look critically at our inventory levels across the group. This will be a strong focus for the year ahead and we have started a group wide project to unwind our working capital position by reducing our inventory to better match prevailing conditions.“

• MCON’s elevated stock position continues to raise doubts about the group’s inherent economics and the level of reinvestment required to deliver higher earnings (see Financials: Stock).

• Sales of MCON’s own-brand equipment gained 19% versus the comparable FY and were up a useful 15% on the comparable H2:

• Third-party sales during H2 fell 13%, which was due perhaps to logistical problems easing and MCON being able to supply its preferred own-brand products. 

• Selling third-party equipment helps MCON satisfy a wider range of orders, but derives much lower margins than selling own-brand products.

• Influencing profit also was a share-based payment credit (€190k), greater R&D spend (€4.4m, up €0.5m), a foreign-exchange gain (€469k)…

• …and government grants, the nature of which MCON did not make clear and were in fact lower than the €194k reported for H1: 

“The Group recognised €119,000 in Government Grants in 2021 [sic] (2021: €450,000). These grants differ in structure from country to country, they primarily relate to personnel costs.”

• All told, MCON’s financials once again did not showcase obvious ‘moat’-like qualities despite the group’s dedication to “superior technical and innovative technology”:

“The Mincon Group is established as The Driller’s Choice because of our superior technical and innovative technology, coupled with our unsurpassed after sales service.” 

• Mind you, this FY did include two references to “return on capital employed“:

“Whilst these results may be creditable in the context of the prevailing market conditions, we are conscious of the need to achieve a greater delivery to the bottom line in the form of improved earnings per share and return on capital employed, and we will concentrate on improving those metrics during 2023.“
…
“These ambitious projects challenge us, but they are essential to underpin our future, maintain our competitive advantages and to drive our profitability and return on capital employed. It also ensures our sustainability as we develop and attract future engineering leaders within the Group.“

• MCON last mentioned “return on capital employed” within its H1 2018 statement, and I therefore trust greater attention is (finally!) being paid to converting the group’s “superior technical and innovative technology” into superior financials (see Financials: Return on equity and revenue per employee).

• The final FY 2022 dividend was set at 1.05 eurocents a share and left the annual payout at 2.10 eurocents for the fifth consecutive year:

Sector divisions

• MCON’s three sector divisions each enjoyed a positive FY:

• FY revenue from mining drills gained 6% to €81m albeit with wide regional variations:

• A greater direct-sales approach, large customers de-stocking and the absence of Russian buyers all influenced mining-related progress. 

• Perhaps in response to ESG enquiries, MCON confirmed it would continue to serve the mining industry:

“Despite the difficult conditions prevailing in the global markets right now, we don’t expect any significant changes in the mining sector. There will always be a need for the materials currently being mined, although the focus may change somewhat from time to time. Our drilling tools operate effectively and efficiently in virtually any mining environment and we will continue to provide the after-sales service in the field that assists in the continuous improvement of our products.” 

• A greater direct-sales approach helped FY revenue from construction drills gain an impressive 45% to €62m:  

“Our direct-to-market approach for mid to large construction projects had a positive result on our construction revenue, where our patented solutions are becoming more recognised as successful application in the industry. We also expanded our footprint through distribution into our APAC region with our solutions for foundation drilling.” 

• The construction division has shown superb progress over time, with revenue doubling since FY 2019 to represent 36% of group sales.

• Acquisitions and new products such as the Spiral Flush have supported construction-related revenue:

• FY revenue from waterwell/geothermal drilling advanced 7%:

• Once again progress was assisted by a direct-sales approach:

“Our growth in waterwell/geothermal consumable supply was in North America, with the vast majority in waterwell drilling supply into smaller communities. We have gained this market share through a direct approach in Canada in key locations and through distribution in the USA as the opportunity there is more widespread with smaller drilling contractors.“

• Two common themes underpinning greater revenue were highlighted throughout MCON’s sector commentary:
  • The group’s direct-sales approach, and;
  • Operations in the Americas.

• Four years ago MCON first talked of selling equipment direct to end customers rather than through intermediaries:

“We are differentiating ourselves from the less developed businesses in low margin activities in the sector, and we are positioning ourselves to deal directly with end customers and to win large contracts.”
…
“Going forward we plan to… seek long-term partnerships and multi-year contracts with end customers incorporating direct delivery to their sites.”

• Direct sales should benefit MCON by:
  • Creating larger supply contracts;
  • Cutting out the intermediary margin, and;
  • Providing greater insight into future customer requirements.

• Although annual revenue has increased a welcome 44% since MCON first talked of direct sales four years ago… 

• …extra resources have been required to support the approach and MCON’s profit margin remains very ordinary (see Financials: Margin). 

• MCON had said direct sales represented 77% of revenue for FY 2021, but did not disclose a proportion for this FY 2022. 

• FY 2022 sales to the Americas jumped a terrific 52%, with the small-print revealing United States revenue surging 74% to represent 25% of group revenue:

• US sales have expanded 269% since FY 2018 and the country has been MCON’s largest market since FY 2019.

• Australasian revenue meanwhile represented 10% of group revenue and has dropped 40% since FY 2018:

• Hopes of an Australasian recovery are pinned on MCON’s new Greenhammer drill:  

“A significant part of rebuilding our revenues in the Australian market will be through our Greenhammer project.” 

Greenhammer

• This FY reiterated the “transformational” potential of MCON’s most promising new product:

“We remain confident in the long-term success of this [Greenhammer] project and believe that the system will be transformational for Mincon and the hard rock surface mining industry.” 

• To recap, MCON first mentioned Greenhammer within the FY 2016 results while the FY 2018 statement described the new drilling system as…

 “[A] disruptive technology, offering tremendous savings in fuel, with an ambitious planned partnership programme in our customer base”. 

• …and suggested the design could enjoy a strong competitive advantage:

“This is not a small system or easily replicable, and we have placed patents around the system to protect it. The system is more than just the hydraulic hammer; it includes all the drill string and the supporting on-rig infrastructure and handling.”

• MCON announced Greenhammer’s first commercial contract last September:

“Mincon is pleased to announce the signing of the first commercial contract for the Greenhammer system.

This milestone is the culmination of many years of development work and is the first step toward revenue generation with a unique drilling system that has a transformational potential for Mincon and the hard rock surface mining industry. The Greenhammer contract is with a blue-chip mining contractor operating on a major gold mine in Western Australia.“

• MCON said this first contract had the potential to become a “multi-million-euro” deal, with initial revenue expected during H2 2022:   

“The contract provides for the mobilisation of the Greenhammer system to be run on a Mincon-owned test rig as well as a full Mincon team to support drilling blastholes on an agreed price per metre drilled. The Greenhammer system is expected to be onsite at the mine and generating revenue early in Q4 2022.“

• This FY statement did not mention Greenhammer revenue. 

• Management commentary instead focused on (third party) rig problems:

“The Greenhammer system has performed to expectations when operating. However, it has been challenging to consistently deliver drilled metres due to reliability issues encountered with the drill rig. As a result, we had to carry out an extensive rebuild on the rig which we are confident will reliably support the system.” 

• Discussions with rig manufacturers to create a reliable drilling platform…

“We believe that the successful roll out of this innovative [Greenhammer] drilling system will require that we closely collaborate with drilling manufacturers to ensure the system is properly supported on a reliable drill rig platform. With that in mind we have engaged in discussions with rig manufacturers with a view to developing mutually beneficial working relationships.” 

• …suggest initial Greenhammer revenue will arrive later than expected. 

• Further information about Greenhammer and its first paying customer remains frustratingly hard to find online. 

• MCON has published limited pictures of Greenhammer, too: 

• MCON capitalised Greenhammer development costs of €0.3m during H1, but did not capitalise any Greenhammer costs during H2 following the first commercial contract.

• Greenhammer amortisation of €121k was charged during H2, leaving capitalised Greenhammer development expenditure since FY 2016 at €7.2m:

• This FY revealed an ambitious amortisation timescale for Greenhammer.

• The 2021 annual report (point 16) had said Greenhammer development costs would be written down over three-to-five years:

“Investment expenditure of €1.1 million, which has been capitalised, is in relation to ongoing product development within the Group. Amortisation will begin at the stage of commercialisation and charged to the income statement over a period of three to five years, or the capitalised amount will be written off if the project is deemed no longer viable by management.”

• But the 2022 annual report now says Greenhammer development costs will actually be written down over 15 years:

“Investment expenditure of €285,000, which has been capitalised, is in relation to ongoing product development within the Group. Amortisation began in October 2022 once the project was commercialised. Amortisation is charged into the income statement over fifteen years on a straight line basis.“

• 15 years is a long time, and implies MCON will receive income from Greenhammer systems until 2038.

• But whether Greenhammer will still be relevant to the group by 2038 remains to be seen. 

• Bear in mind work on Greenhammer commenced around 2011 and the entire project lifespan would therefore appear to be 27 years. 

• The risk to shareholders is the long 15-year amortisation period flatters future earnings by not adequately reflecting the possibility the product becomes obsolete in the meantime. 

• If Greenhammer’s 15-year lifespan is optimistic, the directors may be optimistic about other accounting judgements, too. 

• That said, MCON could currently be selling drills developed 15 years ago and 15-year shelf lives may be quite normal for the industry. (Leave a comment below if you have some insight!)

Subsea drilling and large-diameter hammer drilling

• MCON emphasised the environmental credentials of its seabed drilling venture:

“One of the biggest areas of opportunity arising today is the development of technology to facilitate the switch from fossil fuels to sustainable energy sources. To avail of the opportunities presented by the transition we are currently working on the development of a patented anchoring system for offshore wind turbines. We are developing this system in conjunction with our partners in Subsea Micropiles Limited. “

• This 1m51s video explains the subsea project in more detail:

• MCON’s robotic drill aims to overcome the disadvantages of current subsea drilling, which are: slow installations, complex hammers, dependence on large support vessels and limitations with certain seabed geologies.    

• MCON added: 

“The system will enable the effective anchoring of offshore platforms with reduced environmental and seabed disruption in water depths of up to 200 metres at a lower cost than the systems that are currently in use.” 

• MCON sounded upbeat about recent subsea developments:

“We have successfully run the full-size water powered hammer prototype drilling system at a local quarry. The development of the overall commercial solution is well progressed with our Subsea partners with offshore testing due in H2 2023. [There is] Significant interest within the industry and a growing realisation of the importance of the system to truly scale offshore wind.” 

• MCON noted additional projects outside its core mining, construction and geothermal sectors could be forthcoming:  

“Our goal is to also diversify the business further into new industries through our advantage in engineering and manufacturing capability, though this process will require a considerable amount of investment. This will include partnering with others in our current industries and new industries, as we recognise that customer productivity goals, with sustainability KPIs, cannot be achieved alone.”

• The appointment of a new non-exec with a PhD that focused on “cleantech on pollution prevention” — alongside the introduction of an Environment and Sustainability board sub-committee — suggest new alternative-energy efforts will be prioritised.

• Not much commentary was devoted to MCON’s large-diameter drilling system:

“We also finally got onsite in Malaysia, after COVID-19 restrictions were lifted, to see our large diameter drilling system drilling 1750 mm diameter holes. We were very happy with the performance of the system and believe that there is a great future for this concept within our product offering for the large diameter construction piling industry.”

• This fledgling system has environmental benefits, too:

“There remains significant interest in this system from the large diameter piling industry, especially when emissions reduction requirements in construction are considered.” 

• The comparable FY 2021 statement claimed the prototype had drilled the “largest holes ever… with a single hammer“:

“Another testing success was the drilling that was carried out in Malaysia with our new large diameter hammer system to drill 1750mm diameter rock socket friction piles. We believe that these are the largest holes ever drilled with a single hammer.“

Financials: Margin

• MCON said Greenhammer systems, seabed drilling and large-diameter piling would become “higher margin” activities:

“In particular, our future expansion will be in our higher margin, technically innovative products, such as the Greenhammer system, large diameter piling solutions and our novel system for anchoring offshore wind turbines to the seabed. These are the products that will set us apart from our competitors.“

• The text above reads as if MCON’s existing products will remain lower margin and/or will not set the group apart from its competitors.

• That interpretation is supported by MCON admitting its mining division faces a “more competitive marketplace“:

“The mining consumables industry has become a more competitive marketplace in most of our regions due to inflationary impacts on manufacturing and on the users of mining consumable products. Our strategy is to challenge competitors with more efficient products and thereby bringing greater efficiencies to our customers’ operations.”

• I have bemoaned MCON’s margin performance for some time.

• I bought MCON shares during 2015 partly because of the group’s then attractive 19% operating margin:

“[H]igh margins underpin the notion that MCON has a respectable competitive advantage. The group converted 19% of revenues into profit during 2014 and above 20% during 2011, 2012 and 2013.”

• But the margin has since bobbed between 10% and 15%:

• MCON commendably lists its major operating costs:

• The long-term margin decline has been caused by the greater cost of sales for its own-brand equipment:

• Since FY 2014, the gross margin on own-brand equipment has dropped from 50% to 33% due to:
  • Raw materials increasing from 26% to 32%;
  • Direct employee costs increasing from 12% to 16%, and;
  • Other direct expenses increasing from 12% to 18%…
  • …of own-brand revenue.

• Following the 2013 flotation, MCON has acquired at least 16 businesses to broaden its product range in order to serve customers direct….

• …and in doing so has evolved from operating as a niche, high-margin drill manufacturer with perhaps modest growth prospects into a wider, middle-margin drill supplier with possibly larger growth prospects.

• MCON reckoned its “technically superior products” could garner higher margins from construction work:

“Our technically superior products to service this sector have led to our Group becoming established as a first port of call for those responsible for large-scale, complex geotechnical/construction projects. We are intensifying our focus on this market and we expect to see further growth and increased margins in this business.“

• And last month’s Q1 2023 update also talked of higher margins: 

“Our price increases, introduced in 2022 to offset manufacturing and operating cost increases, have also contributed to better margins than in the first quarter of 2022.”
…
“We continue to improve the efficiencies of our manufacturing plants which will reduce emissions and enhance our manufacturing margins.“

• But the fact remains a sub-15% operating margin since FY 2015 is not commensurate with MCON’s claim of being “the Driller’s Choice” because of “superior technical and innovative technology“…

• …and customers paying a premium for high-quality products not sold elsewhere.   

• Suffice to say, MCON has a long way to go to prove the attractive economics of its industrial drills when specialist engineers such as Halma, Renishaw, Rotork and Spirax-Sarco can deliver margins of 20% or more. 

Financials: Stock

• Logistical difficulties during this FY prompted even higher levels of stock:

“We continued to navigate poor freight conditions which hampered our ability to provide the excellent service-levels our customers expect, as well as requiring working capital investment due to the higher levels of inventory required to manage extended shipping transit times.” 

• Stock ended the year up €14m, or 22%, to €77m, of which €12m was added during H1 and €2m was added during H2.

• Stock at €77m is equivalent to a huge 45% of FY 2022 revenue of €170m.

• For some perspective, SharePad shows MCON ranked 3rd out of 484 companies (excluding house builders and property developers) with revenue of £50m or more on a stock-to-revenue basis:

• True, notable stock levels can feature at ‘quality’ companies, with Diageo ranked 4th on that list. 

• But Diageo’s stock is dominated by “maturing inventories of whisk(e)y, rum, tequila and Chinese white spirits”, which I understand can increase in value while stored in a warehouse. 

• For most companies, carrying large amounts of stock typically means:
  • Manufacturing slow-moving items that carry a greater risk of obsolescence;
  • Applying inefficient working practices, and/or;
  • Requiring greater cash investment into extra stock to support future growth.

• Significant levels of stock have long been an unfortunate drawback of MCON’s balance sheet. 

• Stock has grown from 21% (€18m) to represent 50% (€77m) of the group’s net asset value between FY 2013 and FY 2022:

• Elevated stock levels do seem part and parcel of MCON’s business. 

• MCON’s customers are located throughout the world (often in remote mining locations) and require a “timely supply” of drilling equipment:

“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.“

• At least MCON’s stock is not perishable and write-downs during this FY were not material at €128k.

• Stock turn has remained consistent during recent years but is still lengthy. Average inventory employed during FY 2022 divided by cost of sales incurred gives 220 days (7-8 months): 

• MCON reckons stock levels will reduce during 2023:

“During 2022, we started an inventory reduction programme when there was evidence of improved freight conditions and raw material supply had begun to ease.”
…
“The reduction of inventory levels will continue through 2023 and we would expect to see a decrease in inventory weeks held by the end of this year. We would also expect to see cash released into operations as raw material levels decrease in the first half of 2023.”

• Bear in mind MCON has talked about stock reductions before…

“During 2018, inventory had increased by €13.3 million, and increased further in the first quarter of 2019, since that period inventory has decreased steadily and is now €0.8 million below the 2018 year end level, and management expect that the Groups inventory will continue to decrease.” 

• …although such talk did not have a long-lasting effect.

Financials: Cash flow and net debt

• The extra stock investment extended MCON’s record of poor cash generation.

• Cash invested into working capital came to a net €14.3m, which included prepayments for manufacturing equipment of €3.8m:

• Such prepayments now stand at a not insignificant €9.9m, which suggest MCON does not enjoy fantastic purchasing power with certain equipment suppliers:

• Cash absorbed into working capital (including equipment prepayments) during the last five years totals a substantial €40m:

(*excludes IFRS 16 depreciation **excludes Greenhammer expenditure)

• Five-year expenditure on tangible assets beyond the depreciation charged against earnings meanwhile stands at €17m.

• Factor in €6m spent on Greenhammer, a net €19m spent on acquisitions and €22m spent on dividends, and no wonder net cash has reduced from €26m to net bank borrowings of €15m since FY 2017.

• Total gross bank loans now stand at €31m, but do not appear truly alarming versus:
  • Cash of €16m;
  • FY 2022 earnings of approximately €15m, and;
  • An estimated 3.2% borrowing rate (interest of €870k on average €27m debt).

• But operating with net debt is never ideal and as the pandemic showed, companies with cash set aside for a rainy day stand more chance of sustaining their dividends when adverse events occur.

• Whether MCON should be declaring dividends given its significant cash expenditure is debatable.

• Free cash flow for FY 2022 was a paltry €1.5m and did not cover the annual €4.5m dividend:

• On a five-year view, total free cash flow of €7.9m has not covered the €22m used to pay dividends (let alone acquisition spend of €19m) during the same time. 

• MCON’s dividends ought really to be funded by surplus-to-requirements cash flow and not by extra borrowings. 

• MCON must consider whether its €4.5m annual dividend remains appropriate if further working-capital investments and acquisitions continue to necessitate significant extra debt. 

• Evidence to date of fantastic returns from the debt-funded investments and acquisitions is not entirely obvious (see Financials: Return on equity and revenue per employee).

• Elsewhere in the accounts, year-end trade receivables at €24m represented a welcome 14% of revenue — their lowest proportion for at least ten years: 

• MCON’s accounts are not complicated by defined-benefit pension obligations.

Financials: Return on equity and revenue per employee

• MCON’s ordinary margin and hefty cash expenditure have translated into return on equity numbers of approximately 10%:

• The 10% calculation is underpinned by evaluating MCON’s progress following the group’s 2013 flotation.

• When MCON became a public company, shareholder equity was €86m and net cash was flush from the flotation proceeds at €49m.

• Subsequent reported earnings have totalled €106m:

• Effectively investing €86m to earn a cumulative €106m over nine years equates to a 9% annual average compound return.

• Earning 9% a year on shareholders’ equity is not awful but is not exceptional either. 

• For some perspective, the same nine-year calculation for fellow portfolio member Andrews Sykes is 16% (based on an aggregate £126m earned from a £43m starting equity base).

• Perhaps one day Greenhammer, the large-diameter drills and/or the seabed micro-piling will attract more customers prepared to pay premium prices for advanced equipment, which in turn lifts equity returns to more respectable levels.

• Right now only revenue per employee provides hope that MCON is an above-average business. 

• During the nine years following the flotation, revenue per employee has averaged a useful €260k and improved during this FY to €272k per head, the highest level since FY 2017 (€300k):

• My rule of thumb with revenue per employee is anything beyond £200k might indicate the employees develop higher-value products that could sustain a competitive ‘moat’.

• For perspective, specialist engineers Halma, Renishaw, Rotork and Spirax-Sarco have revenue per employee measures of £200k or less:

• This comparison suggests MCON’s products are indeed high value, which in turn implies the group’s sub-15% margins are due to the inherent greater costs (e.g. raw materials) involved with manufacturing and supplying industrial drills.

• I trust MCON’s revenue per employee can continue to improve over time to reflect higher selling prices, larger supply contracts and new product launches.

Valuation

• MCON implied its construction division would be the group’s best performer during FY 2023:

“In the context of the many uncertainties described above, we expect that some of our markets will experience turbulence from time to time. However, we believe that significant expenditure on infrastructural projects will continue for the foreseeable future in developed economies, especially in the United States.

Our technically superior products to service this sector have led to our Group becoming established as a first port of call for those responsible for large-scale, complex geotechnical/construction projects. We are intensifying our focus on this market and we expect to see further growth and increased margins in this business. “

• May’s Q1 update confirmed positive construction progress:

“Our revenue in the construction industry remains strong and we continue to make progress in winning small to mid-size construction projects in Europe and North America. The very strong construction revenue growth in North America during 2022 has continued at the same level into Q1 2023. Coupled with this, we have also seen good growth in construction revenue for the first quarter in the European market.“

• But the Q1 update admitted lower-than-expected revenue from mining customers:

“While revenue in Q1 2023 was marginally behind the same period in the prior year, we are pleased with further improvement in our gross margin in the first quarter. The reduced revenue in Q1 is a result of lower revenue than expected in the mining industry, due to reduced activity in the exploration sector during the quarter and resultant lower orders from some specific large customers as they adjust their inventories in response. However, we remain confident in our outlook for this segment and expect that our mining revenue will improve as the year progresses.” 

• At least the Q1 2023 margin was greater than the Q1 2022 margin:

“Our price increases, introduced in 2022 to offset manufacturing and operating cost increases, have also contributed to better margins than in the first quarter of 2022. “

• MCON expressed optimism towards FY 2023, profit margins and environmental tailwinds: 

* “We maintain a positive outlook, both for the remainder of 2023 and on our long-term outlook for the industries in which we operate. Our ambitious product development programs should serve us well in the global challenges ahead to reduce carbon emissions. We continue to improve the efficiencies of our manufacturing plants which will reduce emissions and enhance our manufacturing margins.” 

• FY 2022 operating profit was €19.7m, which after 25% tax gives earnings of €14.8m or 6.0p per share with GBP:EUR at 1.16.

• Adjusting the £191m market cap for cash of €16m, borrowings of €31m and a deferred consideration of €2m gives an enterprise value of £206m, or 97p per share.  

• Dividing that 97p per share by my 6.0p per share earnings guess then gives a possible P/E of 16. 

• While the sums could be fine-tuned for lease financing, Greenhammer amortisation and minor other items, my rudimentary multiple does not appear ridiculously cheap nor bonkers expensive.

• Given MCON’s ever-ballooning stock level, an alternative valuation yardstick is the balance sheet.

• This FY showed net tangible assets at €113m or 46p per share, which represents 51% of the 90p share price:

• The shares looked much better value on a net tangible asset basis when I invested at 45p during early 2015.

• For now I am hopeful a mix of:
  • An easing of cost pressures leading to improved margins;
  • Further robust demand from the construction sector;
  • Greater direct sales of equipment;
  • Greater sales from the United States, and/or;
  • Greenhammer and other development projects bearing fruit…

• …can lead to respectable financial progress during the next few years.

• For what they are worth, broker forecasts show profit increasing and net debt decreasing:

• Long-term share-price success will depend upon management’s commitment to superior product quality eventually translating into financial evidence of a superior competitive ‘moat’.

• Right now, MCON’s financials frustratingly do not indicate an obvious competitive advantage… which is perhaps why the shares currently trade at levels first achieved during 2017.

• The stock position needs to reduce and cash conversion needs to improve, and the board really ought to consider whether dividends should be maintained when the payouts have been effectively funded by extra debt during the last few years.

• That said, MCON was established during 1977 and very much remains a family-run business with a corresponding long-term perspective.  

• MCON’s founder still works as a board non-exec in his 80s while his two sons are the lead executives. The family members own a collective 56%/£108m shareholding. 

• No family member sold a share at the 2013 flotation and none has sold a share thereafter.

• I am therefore hopeful:
  • The dominant family shareholders are true owner-managers and have everything in hand;
  • The very ordinary financials of recent years will improve over time, and;
  • Long-haul investors who stay the course will (eventually) be rewarded.

• But I do worry:
  • The dominant family shareholders may continue to focus on costly expansion and overlook logical capital-allocation decisions;
  • The sub-optimal financials of recent years won’t improve over time, and;
  • Long-haul investors who stay the course end up trapped in a ‘fiefdom’ under-performer and illiquid share.

• As clear signs of moat-like financials are awaited, the trailing 2.1 eurocents, or 1.8p, per share dividend supports a modest 2.1% income (before Irish withholding taxes for UK-resident investors).

Maynard Paton