Civmec Limited - KGI Securities 2021-08-12: Well Prepared For The Ongoing Commodity Supercycle


Civmec Limited - Well Prepared For The Ongoing Commodity Supercycle

  • Civmec is an integrated, multi-disciplinary construction and engineering service provider to the Oil & Gas, Metals & Minerals and Defence & Infrastructure sectors. The group provides services in Australia and its manufacturing facilities are located in Western Australia and New South Wales.
  • We initiate coverage on Civmec with an OUTPERFORM recommendation and target price of S$0.86, based on 12x FY2022F P/E.
  • Short and mid-term catalysts. Favourable industry supply and demand dynamics driven by China’s appetite for iron ore.
  • Long-term drivers. Likelihood of increased contract wins as the Australian government ramps up on defence and infrastructure spending; Overall revenue supported by approximately 20% recurring income from maintenance and upgrading works.

Civmec - Company overview.

  • Civmec (SGX:P9D) is a dual-listed Singapore- Australia public company that was listed on SGX in 2012 and ASX in 2018.
  • Civmec provides a wide array of vertically integrated services, such as fabrication projects, modularization, shipbuilding, site civil works, piping, electrical instrumentation, industrial insulation and maintenance to end customers in the Oil & Gas, Metals & Minerals and Defence & Infrastructure sectors.

Civmec - Investment Thesis

2020 financial review: bottom line remained strong.

  • While Civmec’s revenue decreased by 20% y-o-y to A$391.9mil in 2020, gross profit rose by 75% to A$44.7mil. This was mainly due to better margins of 11% in 2020, compared to the 5% in 2019, as the company recovered from cost instability due to COVID-19.
  • With strong support from gross profit and decrease in finance costs, Civmec's net profit surged around 1.5x y-o-y to A$17.5mil in 2020. Order book value remained resilient at A$900mil in 2020 despite the pandemic, a 10% rise from 2019.

Civmec's 9M21 performance is exceeding expectations.

  • Civmec continued to deliver strong results in 3Q21. For the nine months in 2021, top and bottom line have already exceeded full year 2020 results. 9M2021 revenue, gross profit and net profit have increased by 25%, 20% and 37% respectively, as compared to full year 2020 figures.
  • Similar to FY20, Civmec’s main revenue stream is dominated by the resources industry, making up around 83% of total sales. Robust performance was attributable to the 3 new contract wins in 1H21, bringing order book to a total value of approximately A$1.15bn as of end January 2021.

Increase in defence spending.

  • The Australian government’s upcoming defence budget is estimated to reach a massive A$270bn over the next decade as military focus is set on the Indo-Pacific region. Naval expenditure on Offshore Petrol Vessels, which commenced in 2017-2018 is expected to grow, likely creating more new wins for Civmec given its current working relationship with the Royal Australian Navy.

Domino effect from the boom in the resources industry.

  • China’s demand for iron ore has driven up iron ore prices to a record high in May 2021. Lithium prices have also increased, trading near a 3-year high as electric vehicles have grown to be increasingly popular. Oil prices have also done particularly well in 2021, a complete turnaround from negative prices in April 2020.
  • As Civmec’s customers mainly belong to the Metals & Minerals industry, tight supply and increased demand would create more opportunities for mining and exploration projects, in turn benefitting Civmec as a solutions provider.

Civmec - Valuation & Action:

Megan Choo KGI Securities Research | 2021-08-12