Masimba Holdings (MSHL.zw) Review
Masimba Holdings (formerly Murray &Roberts Zim) Review of interim results.
Market Cap = ZWL 9.6 bn = USD 60 m
The developer raked in ZWL 2bn in sales for the first half of the year. If they rake in another billion for the remainder of the year, the Price to Sales ratio will be 3. The P/E ratio is 17.
The company appears undervalued based on the P/S ratio but Overvalued based on the P/E ratio Even though the profit to sales ratio is a decent 13%.
Analyzing this business and forecasting is hard because the bulk of its revenues emanate from large public sector contracts. -Mining -Infrastructure - Roads These revenue sources can quickly dry up depending on the politics of the day, or on government spending appetite.
You cannot reliably extrapolate the growth in sales in the first half of the year to occur through the rest of the year or next year. Rooting for this company is basically betting on politics and an expansionary fiscal policy.
Growth is highly dependent on being in good books with the govt. Anecdotal evidence: The interim report is two pages long, and the word "Government" appears 5 times.
The balance sheet structure is a little bit okay, but the contracts in progress and accounts in progress are outsized (they ought to be generally bigger). But these ones are larger than long-term assets. And also larger than equity and liabilities.
Does this balance sheet has the capacity to sustain this level of operations? The firm might suffer from over-expansion, stretching the business beyond what can be supported by the balance sheet. It would be nice to see the breakdown between WIP and receivables.
To emphasize how receivables are critical for this business, the word appears 55 times in the 2020 Annual report which is 76 pages long. The 2020 breakdown showed receivables were way smaller than WIP. This has to be continuously monitored.
The government is a late-payer, in general. Other large clients, such as mining giants, have a tendency of bullying contractors too. The risk here is that of Masimba becoming very profitable whilst very illiquid, leading to a liquidity crisis that results in sudden death.
For now, the risk is being passed on to subcontractors and other suppliers. Perfect! Accounts Receivable having the same terms as Accounts Payable. It works very well until it doesn't, that's where the stability of the currency is key.
The good thing is that the construction company has had an increase in USD-priced projects. 35% of revenue is now earned in USD. The 65% earned in ZWL is "the exposure", where suppliers can demand earlier payments and prepayments, squeezing the firm's ZWL liquidity.
The mgt team is boosting the capacity of the balance sheet to support the business by buying more equipment, at a rate that is faster than the depreciation of the assets they already have. Capex is where most of the cash generated from operations is going. Brilliant!
The Shareholder composition is not any different from what we have seen on other counters. The big boys dominate. The top 10 institutional holders collectively hold 90%. These are long-term hodlers. They rarely sell.
This shareholder composition reminds one of the reasons why some cryptocurrencies are criticized, the presence of whales. If one whale decides to take some beans off the table, the resulting price compression will be devastating to the smaller shareholders.
Off-balance sheet deleveraging.
I couldn't help but notice that the developer has reduced the contingent liability of Bank Guarantees from a billion last year down to about 400m this year. Remarkable.
I like the company. I like the burgeoning revenues. However, I don't like the P/E ratio, it's expensive at 17. I view the company as a bet on the fiscal policy, and investment climate.
I think the government's purse will be equipped with some dollar liquidity to fund a few more CAPEX projects and Masimba will be waiting on the other end to receive the contracts or to get paid for contracts already delivered.
I think a couple more contracts could be on the horizon from the mining fraternity. Masimba has no real competition in these complex projects.
I don't like the shareholder composition, but I don't think any single whale is going to sell Masimba in the next twelve months. I think the smaller guys as well, will HODL.
Ciao!