Mader Group (ASX: MAD)
Mader Group Limited (“Mader Group” or “Mader”), per its Fiscal Year (FY) 2022 Annual Report, “… is a leading global provider of specialist technical services across multiple industries. Powered by mechanically minded specialists, the diversified group is dedicated to helping customers enhance their operations through optimal fleet and plant performance.” Per the same annual report, Mader Group generated A$402.1 million in revenues and A$27.9 million in net income which were year-over-year increases of 32.1% and 44.4% respectively. Mader Group is headquartered in the mean streets of Perth, Australia.
Here is where the writeup diverges from my usual dealings. I usually write sections on the history of the business, its CEO, their compensation, what the business does, why it’s unique, its valuation and then close with risks, tailwinds and a conclusion. In this writeup I’ll only cover a few of those topics: its most significant competitive advantage, valuation and two additional risks. The rest of the information about Mader Group comes from other sources which I’ve linked below.
Why am I doing this? Well, there are several reasons. One, there is an ample amount of information out there about the business already. Two, I think the information that I’ve come across and curated is of good quality. Three, I read Mader Group’s annual reports and investor presentations and the information I’ve come across about the business checks out. Four, doing my own writeup about the business would essentially be the same thing as what the other sources have already said or written. I think their work, in aggregate, is fairly comprehensive and mine wouldn’t add much, if any, value besides the few topics mentioned above. There is also a part of me that doesn’t want to seem like I’m ripping them off or copying their work in any way. Alright, let’s dive in!
I found out about this business back in May of 2022 in a Discord server that I’m a part of. One of the members in the server posted a link to a series of tweets from Jon Cukierwar of Sohra Peak Capital.
He provided a general breakdown of the business and its operating and competitive position in an 18-tweet thread. A link to Mr. Cukierwar’s tweets on Mader Group can be found here:
You should have a base level understanding of the business by now if you scrolled through all his tweets.
I’m now going to post links to two writeups on Substack that I was lucky enough to come across. One was from the same Discord server I mentioned above and the other was from Twitter. Both are well written deep dives on the business that cover everything from its history to its CEO, their compensation, what its competitive advantages are, etc.
The first writeup is from Jacob Doyle of The Confused Investor. The link to his writeup can be found here:
Pay close attention to paragraphs 4 and 5 which explain Mader’s competitive advantage in detail. I would also look at the second paragraph under the screencap that shows Mader’s growth opportunities and addressable market which explains why its revenues aren’t as cyclical as you would think.
The second writeup I’ll post is from Ben of the ConserValue. Newsletter. The link to his writeup can be found here:
Like the first writeup, he provides an excellent analysis of the business. I would pay particular attention to sections IV and V (linked here and here) which discuss management, executive compensation and the author’s qualitative analysis on this business.
Let’s check out a video presentation 📽️. The link will take you to Matt Joass’ presentation on the business at the 2022 MicroCapClub Leadership Summit. Mr. Joass is the Chief Investment Officer of Maven Funds Management down in Australia. The link his presentation can be found here:
The entire presentation is worth watching, especially the last five minutes where he talks about feedback from Mader’s competitors, its moats, what the market is getting wrong about the business and two legitimate risks.
Mader Group’s Competitive Advantage
I’m only mentioning Mader’s most significant competitive advantage in this section. It might seem a little weird to highlight only one, but I think it’s that important. Shown below is a screencap from slide 18 of Mader’s 2020 Annual Presentation which is linked here.
Mader’s competitive position is what truly sets it apart and makes it a unique business. You can see that it has managed to carve out one hell of a niche in its market. Mader has managed to be cheaper than OEM’s while providing skilled labor quickly and efficiently to its clients. This is by no means its only advantage, but it is the most compelling one that I’m aware of. In short, remember to focus on this while learning about the business!
I’ve run my valuation metrics on the business because I think it’s the only element of analysis that I could add value on. It’s not meant to be a slight to previously linked work, but I just wanted to run my own analysis on the business and see what conclusions, if any, I could come up with.
The screencap below shows Mader’s revenue growth since FY 2017. The data went back to FY 2015, but few financial figures were available. FY 2017 was the first year that had all the financial data required for my analysis so that is the base year that I started with. The data were taken from TIKR.
Revenues have CAGR’d at just over 38.5% since the end of FY 2017. I love to see a business that has the top line growing like a weed. The business currently trades at a ~1.75x sales multiple given its current market capitalization of ~A$720 million.
Let’s see what the geographic breakdown of revenues looks like. The data, also taken from TIKR, are shown in the screencap below.
Mader has expanded its international footprint over the last several years. Unfortunately, the business did not provide revenues by geographic region for FY 2017. Australia was and continues to be the dominant market for Mader Group with its 85% share of total revenues. The North American market has seen massive growth since Mader started doing business here in 2019. Do note that the United States was broken out into its own market in FY 2019 and FY 2020, but has since been consolidated in to “North America” along with Canada since FY 2021.
Mader Group’s balance sheet is shown in the two screencaps below. The first screencap shows the asset side of the balance sheet with the second showing the liabilities and equity side.
Net property, plant and equipment increased more than 10x since 2017 due to the investments in its vehicle fleet and other equipment as the business has grown over the same period. You can learn more about the vehicle fleet investments in both writeups posted above. These combined with increases in receivables since FY 2017 account for an overwhelming majority of the increase in total assets between FY 2017 and FY 2022.
The liabilities on the balance sheet aren’t too concerning at this point. Short and long-term debt have ticked up over the last few years, but I’m not overly concerned given the business’ continued growth, execution and ability to keep gobbling up share in the markets in operates in.
A steady increase in total equity in a business is what I want to see as a potential investor and that’s exactly what’s happened at Mader. Total equity has grown more than 6.5x since FY 2017 which is a CAGR of more than 46% per year. It doesn’t get much better than that.
Free Cash Flow
My calculations for Mader’s free cash flow, what I call “Real Free Cash Flow”, are shown in the screen cap below.
The business doesn’t screen very well on this metric, but that is mainly due to its continued investment in its vehicle fleet. Per its Annual General Meeting Presentation, linked here, Mader claimed to have 900+ support vehicles. Also, if you look at the notes (usually Note 13) in the annual reports, you can see the increases in “plant equipment and motor vehicles” each year. The business even mentioned this in its FY 2022 Annual report on p. 27 where it states, “As at 30 June 2022, Mader maintained its strong liquidity position with net cash inflows from operations for the year of $35.4 million (2021: $16.2 million). Cash outflows from investing activities of $31.0 million is mainly due to the expansion of Mader's fleet of service vehicles.”
Returns on Invested Capital
My calculations for Mader Group’s returns on invested capital (ROIC) are shown in the screencaps below.
The business has routinely achieved returns on invested capital north of 20% since going public and exceeded my baseline of 15%. A concern is that ROIC has trended downward over the last few years. I’m okay with it for now because I think the investment in its vehicle fleet is the right thing given what the business does, the large amount of growth that is still available in its operating markets and how many employees have come on board since it went public. It is something to keep an eye on going forward and is mentioned as a risk later in this writeup.
Returns on Incremental Invested Capital
Let’s look at Mader Group’s returns on incremental invested capital since 2017 which are shown in the screencap below.
Mader’s reinvestment rate has been through the roof and the incremental returns from them have been great. By my calculations, Mader has been compounding its value between 22 – 27% per year since going public. Its stock price has CAGR’d at 40%+ as of the publishing date of this writeup making it too richly valued for me at the current time.
Two Additional Risks
There are two additional risks I’d like to mention that I didn’t see discussed in all the media linked above.
The first is the vehicle fleet itself. 900+ vehicles for a business that has 2,200 employees globally feels like a lot, but what ultimately matters are the returns the investment in those vehicles provide over time. The investment in them is sizable and will be key to Mader’s success in the future so it’s something you need to be comfortable with if you decide to buy shares in the business. I’m also interested in seeing how many vehicles will be purchased with each passing year. It’s just something to keep an eye on. If you’re going to weigh this risk based on its previous track record of overall business success, then the signs appear positive, but I obviously can’t tell if this will be the case over the next several years.
The other risk I thought of comes from the OEMs. There is no chance that they like missing out on all the potential money they could be making from continued maintenance of their equipment. Businesses become quite clever when they realize they’ve missed out on a big revenue stream and I have to think that the OEMs have at least thought about competing with Mader in some way. Its financial performance over the last several years says otherwise, but I wonder if OEMs will start to offer some kind of revised, exclusive, long-term maintenance contract that’s included with the purchase of new mining/heavy equipment? Like I said before, Mader’s financial performance indicates that they haven’t gone through with anything like this yet, but that doesn’t mean they can’t do this in the future.
But Wait, There’s More!
A “Quarterly Operational Update”, linked here, was provided on 10/25/2022 (I know, I’m from the U.S.) detailing Mader’s Q1 FY 2023 financial performance. The business experienced continued success and the highlights are shown in the screencap below.
Before you get to the conclusion, I’d like to personally thank Jon Cukierwar, Jacob Doyle, Ben from ConserValue and Matt Joass for all their work. They deserve almost all the credit for this writeup and a follow from you. Links to their Twitter accounts and content can be found here:
Writeups and content: https://www.sohrapeakcapital.com/content
Ben from ConserValue.
Writeups and content:
Is Mader a good business? No, it’s a great one. If you’ve read the tweets, writeups and presentation on Mader Group that I linked plus what I wrote on what makes it unique and its valuation then I think there’s a compelling case to be made for it. While it has risks like any business, I don’t think they outweigh the positives or even come close to doing so. The biggest drawback for me with the business is its valuation. It’s simply too rich for me currently. I will absolutely keep my eye on it though and add it to my watchlist along with $BOTB.L, $PLBC, $ESQ, $RVLV and $YETI because I think it’s that good.
Thanks again as always for reading. If you liked this writeup then please feel free to share it and subscribe!
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*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***
Disclosure: I do not own shares in Mader Group.