RE:Paradigm's Upgrade MCR to $10 Revising Margin Assumptions
Investment Thesis. Macro is active the construction and maintenance on pipeline and compressor
station projects. The company has built a significant backlog of work related to major pipeline
projects in western Canada.
Event
Following Macro Enterprises’ (MCR) Q2 results, we have revised our revenue
estimates and margin assumptions, while also adding the Trans Mountain project to
our forecast for 2019 and 2020.
Highlights
Q2 Margins Caught Our Attention | MCR reported a Q2 gross margin of 23%
and an EBITDA margin of 21%. While the second quarter margins were inflated
slightly owing to the timing around the recognition of revenue, management has
been talking about focusing on improving margins for some time. The shift came
admittedly a lot faster than we had anticipated. Our previous forecast had
assumed margins in the low teens for 2019 and 2020. Following the quarter, we
have modified our assumptions on both large contracts and MCR’s core business.
This evaluation has resulted in increases of 4% for 2019 and 3% for 2020.
Company’s 2019 Revenue Forecast Increases | MCR raised its 2019 revenue
expectations to $400mm (from $350mm). The company also introduced its 2020
revenue forecast of $300mm plus any contribution from the core business.
Increasing Confidence in Trans Mountain | While MCR is still waiting on official
word to proceed with construction, it is preparing to begin work during Q4/19. If
that is the case, MCR should be in full swing on Trans Mountain by the summer
construction season of 2020.
Valuation & Conclusion
MCR’s second upward revision to its revenue forecast is indicative of the level of
activity within its industry and a reflection of the significance of being awarded work on
both the Coastal GasLink and Trans Mountain projects. MCR will spend some
additional capital in 2019 to add equipment needed to meet the demand. Its focus on
margin improvement and expectation to be able to add more core business in the
coming years gives us confidence in the long-term outlook for the company. Our
estimates now reflect revenue from the Trans Mountain project. Lower margins in 2020
when compared to 2019 are a reflection of lower margins on both major projects as
they become a larger portion of total revenue. We maintain our Buy recommendation
and increase our target price to $10.00 (from $7.00) (5.0x EV/EBITDA based on our
2020 estimates)