I was asked for a note on Mayfield Group (ASX: MYG) which is a microcap electrical manufacturer and contractor, in which I have a small investment.
I don’t really have a fully-formed thesis for the stock, but I am quite interested in whether the renewal of the grid over the next few years might drive demand for electric wiring services. On top of that, the continual construction of data centres adds some demand for communications wiring. Suffice it to say I think the general sector could experience strong demand in the medium term.
On top of that Mayfield is reporting consistent profit results, with strong free cash flow, as you can see from the chart below:
Based on recent performance, assuming that the business can make around $4m in profit before tax per year would be reasonable. That translates to about $3m in NPAT if you assumed the normal tax rate. The actual profit after tax was exaggerated due to the recognition of prior tax losses worth over $1.9m during the year.
Thinking longer term, Mayfield has recently completed design of its Battery Energy Storage System (BESS), which will be trialled in Adelaide in FY25 before being released to the market. Obviously, there is no guarantee this kind of investment in developing capabilities will pay off, but it fits nicely with what I would like to see happen in the short term. While I wouldn’t have much confidence in the absence of significant sales traction, part of the reason I own Mayfield Group is just to make sure I follow its progress.
At Mayfield, the majority of the board do not own shares. However, two board members have significant holdings that provide alignment. Namely Lindsay Phillips, who owns over 41.5 million shares, and Alan Steele, who owns almost 12.5 million shares. Together, they own over $42m worth of shares, and well over 50% of the company (which has about 91.5m shares on issue, alongside around 5 million options that are likely to become shares).
Ultimately, what I see is a company with an aligned board, making around $3m per year (normalised), with strong free cash flow. On top of that, the company has a tax asset worth over $5m and franking credits worth over $8m and over $16m net cash. It is available for a market capitalisation of under $80m, implying a normalised P/E ratio of around 26.5.
Given that free cash flow should be well in excess of the normalised profit after tax of ~$3m per year, the company can afford to pay dividends (it is on a trailing yield of over 3.75%, fully franked) and also buyback shares (though it has not bought back shares). If it can take advantage the deferred tax asset and distribute the franking credits, that should create value for shareholders worth a significant portion of the purchase price.
This means that I think there should be some valuation support for the business, if not at current levels, then at least at some level well above zero! The upside, of course, would only arise if the business can boost profits as a result of strong demand. There is no guarantee of this, but I figure there is a chance of it, and if the signs fall into place then I would like to notice them!
Ultimately, even though I don’t have a lot of confidence in this business, it is profitable and generates free cash flow, so that makes it a lot better than most microcaps. It seems sensible (to me) to keep an eye Mayfield Group, in case it benefits from strong demand. And since I always watch a stock more closely if I own it, I decided to buy some shares.
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Disclosure: The author of this article owns shares in MYG and will not trade MYG shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).