Civmec Limited - KGI Securities 2021-09-08: Strong Fundamentals Spearheading Growth


Civmec Limited - Strong Fundamentals Spearheading Growth

  • Earnings beat. Civmec’s FY2021 net profit surged 97% y-o-y to A$34.6mil, beating our estimates of A$33.5mil.
  • China’s iron ore appetite. Even though iron ore prices have been on a downtrend recently as Chinese policymakers attempt to cut steel production, China’s iron ore imports hit new highs in August, suggesting the country’s continued reliance on the commodity.
  • Mid and 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. Buoyant commodity market to drive capex spending for miners.
  • We maintain an OUTPERFORM recommendation for Civmec and revise our target price to S$0.90, based on an unchanged 12.0x FY2022F P/E.

Civmec's 2021 financial update: Outstanding results.

  • Civmec (SGX:P9D)’s revenue jumped by 72% y-o-y to A$674.2mil for FY2021 (Year-end 30 June 21) while net profit surged by 97.3% to A$34.6mil. Overall gross profit margin remained relatively flat at approximately 11%, whereas net profit margin increased from 4.5% to 5.1% y-o-y.
  • Main revenue driver continues to be the Metal and Minerals sector which increased 66% y-o-y, making up 83% of total revenue for FY2021. Infrastructure sector’s revenue rose by 94% mainly due to the contribution from the OPV project awarded by the Royal Australian Navy, whereas revenue for the Oil & Gas sector surged by 144%, amidst the rally in oil prices in 2021.

Resources sector remain strong.

  • As of early September, the Bloomberg Commodity Index (BCOM Index) gained a total of approximately 34% y-o-y and is around 5% higher compared to its 5-year high. According to S&P Global, the near-term outlook for the mining industry remains strong as pent-up demand emerges post-pandemic. As vaccination campaigns ramp up, rebounding economic activity is driving demand for many commodities, buoyed by government stimulus efforts around the world.
  • Whereas in the longer term, the sector will capitalize on raw material needs critical to the global energy transition efforts, driven by ESG minded companies.

Customer’s capex spending to remain resilient.

  • According to Civmec’s largest customers, such as Rio Tinto and BHP, capex spending remains unchanged in the companies’ latest financial results guidance. Capex spending for Rio Tinto is expected to be A$7.5bn for both 2021 and 2022, whereas for BHP, capex spending is expected to be US$7.3bn and US$8.5bn for 2021 and 2020 respectively. Civmec’s order book is currently at A$1.0bn as of end-FY2021, and is expected to grow given the strong repeat business from long-term clients.

Port Hedland: A mighty base.

  • Civmec has acquired 5 hectares of land in Port Hedland to establish a permanent operated facility to focus on construction and maintenance activities in Pilbara. The facility is currently in the design phase, with A$10mil expected to be invested over 18 months. As the nature of mining sites require repair and maintenance approximately every 6 weeks, a firm foothold in the area would accelerate efficiency and minimise cross-border travelling for employees. Around A$1bn worth of recurring revenue is expected through maintenance contracts for Pilbara.

Civmec's valuations and peer comparison

Singapore peers.

  • Civmec’s closest peer comparison among Singapore-listed companies is AusGroup (SGX:5GJ), a construction and integrated services company which services the oil and gas and mineral resource industries. As there is no forward P/E available for Ausgroup, we have used historical P/B as the next best indicator, of which Civmec is trading at 1.3x, compared to AusGroup’s 1.8x.
  • The key difference between Civmec and AusGroup is that the former provides services to both the private sector and government sector whereas the latter is focused only on the private sector, reinforcing Civmec as a relatively cheaper stock compared to AusGroup given its diversification.

Australian peers.

  • Large cap stock, Cimic, provides engineering-led construction, mining, services, and public private partnerships services. The company constructs various projects, including rail and road developments, social infrastructure projects, infrastructure projects, hospitals, airports, sewerage systems, and PPP projects. It has operations in Australia, Asia, Middle East, America, and Africa. Civmec is currently trading at 9.0x forward P/E, a 42.3% discount compared to its peer trading at 15.6x forward P/E. Taken into consideration that Cimic has a larger market cap and has operations in other countries besides Australia, we have used a lower 12.0x P/E for Civmec’s 12-month target price.
  • Among the small to mid-cap stocks, Civmec’s closest peers among Australian-listed companies are GR Engineering Services and SRG Global. GR Engineering Services is an engineering, consulting, and contracting company that provides engineering design, procurement, and construction services to the mining and mineral processing industries in Australia and internationally. The company is currently trading at a 11.0x forward P/E and has a market cap of 208mil. SRG Global provides engineering-led specialist asset, construction, and mining services, supplying to customers in various sectors comprising oil and gas, energy, major infrastructure, offshore and mining. The company is currently trading at 11.9x forward P/E and has a market cap of 176mil. Our estimate of 12.0x P/E for Civmec’s 12-month target price is slightly more optimistic compared to the forward P/E average of 11.4x for both companies.
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Summary: FY21 update.

  • The average forward P/E of Australian engineering firms has declined slightly to 10.9x, compared to the previous average of 13.7x P/E upon initiation. The overall decline in P/E was mainly attributable to Imdex and Swick Mining Services, whereas the average P/E and price of other peers remain relatively stable. Amidst Australian-China tensions and China’s deceleration of steel output which adversely impacted iron ore prices, we believe that negative sentiment is short-term and given Civmec’s strong fundamentals and financials, backed by a solid order book and several government projects, justifies its long-term growth.

Civmec's key risks:

  • Further exacerbation of Australian-China tensions may result in trade sanctions on a wider array of Australian exports; Rising labour costs in Australia due to labour shortage may result in higher costs; Execution risks.

Megan Choo KGI Securities Research | https://www.kgieworld.sg/ 2021-09-08