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ab

Global Equity Research Australia Industrial Services

UBS Investment Research The Mac Services Group Limited

12-month rating

Buy *

12m price target

A$2.80/US$2.54 Prior: A$2.50/US$2.27

Unchanged

Packing them in

Price

„ Strong 1H10 result The Mac reported strong 1H10 NPAT of $13.8m, up 14% yoy and ahead of UBSe of $12.2m. Even excluding a contract settlement normalised NPAT was up 8% yoy. The result was stronger across the board, with both revenues and margins up yoy and ahead of UBSe. Operating cashflow of $12.6m, down 30% yoy, was the only negative and was the result increased working capital. As expected an interim dividend of 4.5cps was declared „ Positive EPS revisions to FY10-12 On the back of the 1H10 result we have made positive revisions to our FY10-12 estimates. We have raised our FY10-12 revenue estimates by 3-12% to reflect the current environment and expected room additions; and increased our EBITDA margins by 110bps in FY10 and 10bps in FY11-12. This has resulted in our FY1012 EPS estimates being revised up c6%.

A$2.44/US$2.21

RIC: MSL.AX BBG: MSL AU

24 February 2010 Trading data (local/US$) 52-wk range

A$2.44-0.78/US$2.18-0.50

Market cap.

A$0.40bn/US$0.36bn

Shares o/s

165m (ORD)

Free float

40%

Avg. daily volume ('000)

104

Avg. daily value (A$m)

0.2

Balance sheet data 06/10E Shareholders' equity

A$0.15bn

P/BV (UBS)

2.8x

„ Reiterate Buy rating We reiterate our Buy rating The Mac as we expect that the company’s high degree of exposure to the coal industry, c90% of earnings, will drive compound earnings growth of 15.6% over FY09A-12.

Net Cash (debt)

(A$0.05bn)

„ Valuation: Price target increased to $2.80 Incorporating our revised estimates and rolling forward our DCF, our price target has increased to $2.80 from $2.50. Our price target equals our one year forward DCF valuation of $2.57.

Forecast stock return

Forecast returns Forecast price appreciation

+14.8%

Forecast dividend yield

5.7% +20.5%

Market return assumption

9.3%

Forecast excess return

+11.2%

EPS (UBS, A$)

Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$2.44 on 24 Feb 2010 16:42 EST

200 150

2.50 2.00

100

1.50 1.00

50

Price Target (A$) (LHS)

01/10

0.00

10/09

0.50 07/09

06/12E 36.9 24.2 6.4 11.0 4.5

3.00

04/09

06/11E 36.7 23.6 7.2 12.6 4.0

Rel. All Ordinaries

01/09

06/10E 36.5 22.2 7.6 14.6 3.8

Stock Price (A$)

3.50

10/08

06/09 33.7 23.3 5.2 9.9 5.8

4.00

07/08

5-yr hist av. -

06/09 Actual 0.08 0.07

Cons. 0.15 0.17

Performance (A$)

04/08

06/12E 154 57 37 0.22 0.11

01/08

06/11E 136 50 32 0.19 0.10

10/07

06/10E 116 42 28 0.17 0.09

07/07

06/09 107 36 24 0.15 0.09

04/07

Profitability & Valuation EBIT margin % ROIC (EBIT) % EV/EBITDA (core) x PE (UBS) x Net dividend yield %

06/08 80 28 18 0.13 0.08

H1 H2E 06/10E 06/11E

01/07

Highlights (A$m) Revenues EBIT (UBS) Net Income (UBS) EPS (UBS, A$) Net DPS (UBS, A$)

06/10E To 0.08 0.08 0.17 0.19

From 0.07 0.08 0.16 0.19

0

Stock Price (A$) (LHS)

Rel. All Ordinaries (RHS)

Source: UBS

www.ubs.com/investmentresearch

Martin Byers Analyst martin.byers@ubs.com +61-2-9324 3174

This report has been prepared by UBS Securities Australia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 6. * Exception to core rating bands; See page8 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.


The Mac Services Group Limited 24 February 2010

1H10 result review Result ahead expectations

The Mac reported strong 1H10 NPAT of $13.8m, up 14% yoy and ahead of UBSe of $12.2m. Even excluding a contract settlement, normalised NPAT was up 8% yoy. The result was stronger across the board, with both revenues and margins up yoy and ahead of UBSe. Operating cashflow of $12.6m, down 30% yoy, was the only negative and was the result increased working capital. As expected an interim dividend of 4.5cps was declared, inline with UBSe and up 6% yoy. Outlook/guidance: Management did not provide specific guidance, but did indicate that they expect a solid 2H10 to be driven by improving market conditions, which relates to recent strengthening of commodity prices, in particular coal. As a result, management are seeing an increase in forward bookings and therefore expect to install c1,000 new rooms over the next 18 months. Table 1: 1H10 result review The MAC Services

Units

1H09A

1H10A

% Change

1H10E

% Change

Summary Profit & Loss Revenues

$m

53.3

56.7

6.4

54.5

3.9

EBITDA

$m

23.8

27.9

17.2

25.6

8.8

Depreciation & Amortisation

$m

-5.4

-7.1

31.7

-6.3

13.3

EBIT

$m

18.4

20.8

12.9

19.3

7.4

Net Interest Expense

$m

-1.0

-1.6

53.6

-1.9

-15.5

Tax Expense

$m

-5.2

-5.4

2.5

-5.2

2.6

Normalised NPAT

$m

12.1

13.1

8.2

12.2

7.3

Reported NPAT

$m

12.1

13.8

13.9

12.2

13.0

DPS

cps

4.3

4.5

5.9

4.5

0.0

Reported EPS

cps

7.8

8.4

7.0

7.4

13.0

EBITDA margin

%

44.6

49.1

10.1

46.9

4.7

EBIT margin

%

34.5

36.6

6.1

35.4

3.3

Interest cover

x

17.6

13.0

-26.5

10.2

27.1

Operating Cash Flow

$m

18.2

12.6

-30.8

17.9

-29.4

Capex

$m

-37.2

-4.0

-89.2

-3.6

12.8

Free Cash Flow

$m

-18.9

8.6

-145.5

14.3

-39.8

Net Debt

$m

25.4

48.1

89.4

42.9

12.2

Equity

$m

130.7

143.1

9.4

137.5

4.0

Net Debt/Equity

%

19.4

33.6

73.1

31.2

7.9

Summary Cash Flow

Summary Balance Sheet

Source: Company data, UBS estimates

UBS 2


The Mac Services Group Limited 24 February 2010

Revenues: Group revenues of $56.7m, grew 6.4% yoy, and were ahead of UBSe of $54.5m. Chart 1: Group revenues 1H08A-2H11E 80

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

70 60 50 40 30 20 10 0 1H08A

2H08A

1H09A

2H09A

Revenues $m

1H10A

2H10E

1H11E

2H11E

Growth % (RHS)

Source: Company data, UBS estimates

EBITDA Margin: Group EBITDA margin of 49.1%, increased 450bps yoy and was ahead of UBSe of 46.9%. The yoy increase in margins was primarily driven by lower labour expenses of $11.2m down from $13.2m pcp. Chart 2: Group EBITDA 1H08A-2H11E 35

50% 49% 48% 47% 46% 45% 44% 43% 42% 41%

30 25 20 15 10 5 0 1H08A

2H08A

1H09A

2H09A

EBITDA $m

1H10A

2H10E

1H11E

2H11E

Margin % (RHS)

Source: Company data, UBS estimates

Balance sheet: The Mac ended the period with net debt of $48.1m, which was down from $50.2m at the end of Jun-09. Based on the 1H10 results, net debt/equity was 33.6% and EBIT interest cover was 13x. Cashflow: Operating cash flow of $12.6m was below of UBSe of $17.9m, largely due to increased working capital With capex of $4.0m vs UBSe of $3.6m, free cash flow of $8.6m was also below UBSe of $14.3m.

UBS 3


The Mac Services Group Limited 24 February 2010

Chart 3: Group cash flows 1H08A-2H11E 35

120

30

100

25

80%

20

60%

15

40%

10 5

20%

0

0% 1H08A

2H08A

1H09A

EBITDA $m

2H09A

1H10A

Operating CF $m

2H10E

1H11E

2H11E

Cash Conversion % (RHS)

Source: Company data, UBS estimates

Estimate Revisions On the back of the 1H10 result we have made positive revisions to our FY10-12 estimates. We have raised our FY10-12 revenue estimates by 3-12% to reflect the current environment and expected room additions; and increased our EBITDA margins by 110bps in FY10 and 10bps in FY11-12. This has resulted in our FY10-12 EPS estimates being revised up c6%. Table 2: FY10-12 estimates revisions The MAC Services

Units

New

Prev.

(%)

New

Prev.

(%)

New

Prev.

(%)

2010E

2010E

Change

2011E

2011E

Change

2012E

2012E

Change

Revenues

A$m

116.4

113.0

3.0

136.4

125.9

8.4

154.4

138.1

11.8

EBITDA

A$m

55.9

53.0

5.5

64.1

59.1

8.6

72.6

64.8

12.0

EBIT

A$m

42.5

40.6

4.6

50.1

46.8

7.1

57.0

51.8

10.1

Net interest expense

A$m

-3.6

-3.6

0.2

-5.0

-2.8

76.2

-5.3

-2.4

117.8

PBT

A$m

38.8

37.0

5.0

45.1

43.9

2.6

51.7

49.3

4.8

Tax expense

A$m

-11.3

-11.1

1.6

-13.1

-13.2

-0.7

-15.0

-14.8

1.5

NPAT (normalised)

A$m

27.6

25.9

6.5

32.0

30.8

4.1

36.7

34.5

6.3

EPS (normalised)

cps

16.7

15.7

6.5

19.4

18.6

4.1

22.3

20.9

6.3

DPS

cps

9.3

9.3

0.0

9.8

9.8

0.0

11.0

11.0

0.0

Source: Company data, UBS estimates

Rating and price target Incorporating our revised estimates and rolling forward our DCF, our price target has increased to $2.80 from $2.50. Our price target equals our one year forward DCF valuation of $2.57. We continue to use a WACC of 11% and TGR of 2%. We reiterate our Buy rating on The Mac as we expect that the company’s high degree of exposure to the coal industry, c90% of earnings, will drive compound earnings growth of 15.6% over FY09A-12.

UBS 4


The Mac Services Group Limited 24 February 2010

Mac Services (MSL.AX) MARKET INFORMATION

COMPANY DESCRIPTION

Rating: Price (as of 24-Feb-10): (A$) Price Target (12 months): (A$) Shares outstanding: (m) Market Capital (A$ m): Avg. daily turnover (A$ m): Year end: Website: Major Shareholders:

Buy (CBE) 2.44 2.80 164.7 402.0 0.2 June www.themac.com.au -

INVESTMENT SUMMARY (A$ m) Net profit [reported] Net profit [adjusted] EPS [reported] EPS [adjusted, diluted] EPS Growth (%) PER [adjusted]* (x) Dividend Payout ratio, [EPS adj.] (%) Dividend Yield [Net]* (%) Shares [period-avg, basic] (m) Book value per share Price to Book* (x) Equity Free Cash Flow Yield (%) Franking (%)

KEY RATIOS 2009 24 24 0.15 0.15 17.6 9.9 0.09 57 5.8 156.4 0.82 1.8 (9.6) 100

2010E 28 28 0.17 0.17 13.6 14.6 0.09 55 3.8 164.7 0.88 2.8 2.9 100

2011E 32 32 0.19 0.19 16.1 12.6 0.10 50 4.0 164.7 0.98 2.5 0.5 100

2012E 37 37 0.22 0.22 14.7 11.0 0.11 49 4.5 164.7 1.09 2.2 4.4 100

2009

2010E

2011E

2012E

Profitability (%) Revenue growth EBITDA margin EBIT margin Effective tax rate Return on Inv Cap (post-tax) Return on Equity

33.7 44.9 33.7 30.0 16.3 21.8

9.0 48.1 36.5 29.0 15.8 19.6

17.2 47.0 36.7 29.0 16.8 20.8

13.2 47.0 36.9 29.0 17.1 21.5

Capital Structure Net Debt / EBITDA (x) Net Debt / Common equity (%) Net Debt / Core EV* (x) Capex / Depreciation (x) EBIT / Net Interest (x)

0.5 37.0 0.2 5.5 18.1

0.4 36.4 0.1 1.6 11.7

0.9 41.2 0.1 2.9 10.1

0.9 36.8 0.1 2.1 10.8

2009 107 48 (12) 36 (2) 0 0 34 (10) 0 0 24 0 24

2010E 116 56 (13) 42 (4) 0 0 39 (11) 0 0 28 0 28

2011E 136 64 (14) 50 (5) 0 0 45 (13) 0 0 32 0 32

2012E 154 73 (16) 57 (5) 0 0 52 (15) 0 0 37 0 37

(A$ m) Revenue EBITDA [adjusted] Depreciation & Amortisation EBIT [adjusted] Net interest Income from associates Other non-operating items Profit before tax [adj] Tax on pre-abnormal profit Minority Interests Dividends (preferred) Net Profit [adjusted] Abnormal Gain/(Loss) after Tax Net Profit [reported]

1H 09 53 24 (5) 18 (1) 0 0 17 (5) 0 0 12 0 12

2H 09 54 24 (7) 18 (1) 0 0 17 (5) 0 0 12 0 12

1H 10 57 28 (7) 21 (2) 0 0 19 (5) 0 0 14 0 14

2H 10E 60 28 (6) 22 (2) 0 0 20 (6) 0 0 14 0 14

2009 2 20 1 183 1 1 5 212 16 52 9 0 76 0 136 212 (50)

2010E 0 22 1 190 1 1 4 219 8 53 11 0 73 0 146 219 (53)

2011E 1 26 1 218 1 1 4 252 10 68 12 0 90 0 162 252 (66)

2012E 2 29 1 235 1 1 4 272 11 68 13 0 92 0 180 272 (66)

(A$ m) Market capital Net debt / (cash) [avg] Estimated share buy backs Minorities Pension provisions Total Enterprise Value (Non-core assets) Core Enterprise Value Core EV Ratios EV / Sales EV / EBITDA EV / EBIT EV / OpFCF [post-tax] EV / Invested Capital

2009 222 25 0 0 0 247 0 247

2010E 402 25 0 0 0 427 0 427

2011E 402 60 0 0 0 462 (1) 461

2012E 402 66 0 0 0 468 (1) 467

2.3 5.2 6.9 <0 1.6

3.7 7.6 10.0 16.2 2.2

3.4 7.2 9.2 22.8 2.2

3.0 6.4 8.2 12.3 2.0

2009 107 36

2010E 116 42

2011E 136 50

2012E 154 57

2009 36 12 (8) 0 40 (2) (9) 0 29 (66) (37) 0 (13) 45

2010E 42 13 (8) 0 48 (4) (12) 0 32 (21) 11 0 (14) 0

2011E 50 14 (3) 0 62 (5) (13) 0 44 (41) 2 0 (16) 0

2012E 57 16 (2) 0 70 (5) (15) 0 50 (33) 18 0 (17) 0

PROFIT AND LOSS (A$ m) Revenue EBITDA [adjusted] Depreciation & Amortisation EBIT [adjusted] Net interest Income from associates Other non-operating items Profit before tax [adj] Tax on pre-abnormal profit Minority Interests Dividends (preferred) Net Profit [adjusted] Abnormal Gain/(Loss) after Tax Net Profit [reported]

PROFIT AND LOSS [HALF YEAR]

BALANCE SHEET (A$ m) Cash & equivalents Accounts receivable Inventory Fixed assets Intangibles Investments Other assets Total Assets Accounts payable Short & long term debt Provisions & other Preferred securities Total liabs & pref shares Minorities Common equity Total liabilities & equity Net cash / (debt)

The MAC Services Group Limited is an accommodation services provider that PROFILE- in providing an integrated service to the coal mining, construction, specialises resource and tourism industries. As at 31 December, 2007, The MAC had 3,558 rooms under ownership and management in the townships of Nebo, Coppabella, Moranbah, Middlemount and Dysart in the Central Bowen Basin region of North Queensland and Kambalda in Western Australia.

ENTERPRISE VALUE*

DIVISIONAL BREAKDOWN (A$ m) Total Revenue EBIT

CASH FLOW (A$ m) Operating income [EBIT, UBS] Depreciation & Amortisation Net change in working capital Other (operating) Pre-tax op cash flow Interest (paid) / received Tax paid Other Operating cash flow Capital expenditure Free cash flow Net (acquisitions) / disposals Dividends paid (Common) Shares issued/(repurchased)

Source: UBS estimates, * Historical valuations are based on an average share price for the period. Current & future valuations are based on a share price of A$2.44 on 24-Feb-2010

UBS 5


The Mac Services Group Limited 24 February 2010

Q

The Mac Services Group Limited

The MAC Services Group Limited is an accommodation services provider that specialises in providing an integrated service to the coal mining, construction, resource and tourism industries. As at 31 December, 2007, The MAC had 3,558 rooms under ownership and management in the townships of Nebo, Coppabella, Moranbah, Middlemount and Dysart in the Central Bowen Basin region of North Queensland and Kambalda in Western Australia.

Q

Statement of Risk

Risks include: MSL’s ability to source and secure new land; the majority of MSL’s clients are involved in the mining industry which has historically been cyclical; as such any downturn in the mining industry could adversely impact MSL; At present MSL has very limited competition, as such an increase in competition for new projects could limit MSL’s ability to grow and diversify geographically.

Q

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

UBS 6


The Mac Services Group Limited 24 February 2010

Required Disclosures This report has been prepared by UBS Securities Australia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell

Rating Category Buy Hold/Neutral Sell Rating Category Buy Sell

1

Coverage 48% 40% 13% 3 Coverage less than 1% less than 1%

2

IB Services 40% 35% 26% 4 IB Services 17% 67%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 December 2009.

UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell

Definition FSR is > 6% above the MRA. FSR is between -6% and 6% of the MRA. FSR is > 6% below the MRA. Definition Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.

UBS 7


The Mac Services Group Limited 24 February 2010

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities Australia Ltd: Martin Byers.

Company Disclosures Company Name 20 The Mac Services Group Limited

Reuters MSL.AX

12-mo rating Short-term rating Buy (CBE) N/A

Price A$2.20

Price date 23 Feb 2010

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 20.

Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

UBS 8


The Mac Services Group Limited 24 February 2010

The Mac Services Group Limited (A$) Price Target (A$)

Stock Price (A$)

4.00 3.00 2.00 1.00

01-Jan-10

01-Oct-09

01-Jul-09

01-Apr-09

01-Jan-09

01-Oct-08

01-Jul-08

01-Apr-08

01-Jan-08

01-Oct-07

01-Jul-07

01-Apr-07

01-Jan-07

01-Oct-06

01-Jul-06

01-Apr-06

01-Jan-06

01-Oct-05

01-Jul-05

01-Apr-05

01-Jan-05

0.00

Buy Neutral No Rating

Source: UBS; as of 23 Feb 2010

UBS 9


The Mac Services Group Limited 24 February 2010

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