CIVMEC LIMITED (SGX:P9D)
Civmec - 1QFY22 Results Above Expectation; Positive Outlook With More Opportunities
- Civmec (SGX:P9D)'s 1QFY22 net profit of A$11m (+62% y-o-y) was slightly above our expectations, at 26% of our full-year estimate.
- Civmec remains positive on its future outlook given the robust and growing orderbook, which has increased 21% y-o-y to A$1.15b. In addition, Civmec sees a strong pipeline of tendering opportunities across all the sectors it operates in, with emerging opportunities in new sectors including battery minerals, rare earths and hydrogen plants.
- Maintain BUY and target price of S$0.98.
CIVMEC'S 1QFY22 RESULTS
- Solid earnings growth for 1QFY22 and robust orderbook. Civmec's 1QFY22 net profit of A$11m (+62% y-o-y) was slightly above our expectations, at 26% of our full-year estimate. We see room for earnings surprises given the strong orderbook and contributions from the third offshore patrol vessel (OPV) in Civmec’s Henderson facility, which is expected to start in 2QFY22. With three OPVs under construction concurrently, we expect Civmec’s defence segment to deliver better results. Civmec also delivered a robust and growing orderbook, which has increased 21% y-o-y to A$1.15b.
- Strong tendering opportunities across all the sectors. Civmec continues to see a strong pipeline of tendering opportunities in all the sectors it operates (resources, energy and defence). Civmec continues to have early contractor involvement with many existing and new clients across various commodities for future opportunities and expects to continue to replenish its orderbook throughout FY22.
- Well-positioned to tap on emerging opportunities in the clean and new energy segments. With an increasing focus on emissions reductions worldwide, Australia is beginning to see increased activity with announcements for development of plants associated with supply of battery minerals, rare earths, hydrogen and ammonia plants. Australia’s CSIRO (The Commonwealth Scientific and Industrial Research Organisation) has reported that in Australia and New Zealand, there are 60 hydrogen projects in various stages of development. The skills and experience Civmec has gained since inception puts it in a strong position to secure contracts for the manufacture of components and construction of these plants in the future.
STOCK IMPACT
- Positive industry outlook with Australia’s resource and energy exports expected to reach record levels. As the world’s economy rebounds from the impact of the COVID-19 pandemic, the outlook for Australia’s mineral sector continues to improve with demand for mining products increasing. The Office of the Chief Economist’s Resources and Energy Export Values Index rose 11.8% y-o-y in Mar 21 (1.8% rise in prices added to a 10% gain in volumes) and export earnings are forecast to be a record high of A$296b, slightly higher in real terms than the record set in 2019–20.
- Beyond OPVs, Civmec is also exploring other major defence projects, including warships and submarines. The A$3b OPV contract won by Civmec in 2018 is only a fraction of the A$89b continuous shipbuilding contract budgeted by Australia. We note that the defence sector has very high barriers to entry with only two players being approved for shipbuilding, with the other player being Australian Submarine Corp. This should translate to attractive margins. We note that Civmec’s net margin started improving in FY21, where its FY21 net margin of 5.2% was notably higher than its FY20 net margin of 4.5%.
- Minimal disruptions from COVID-19. Civmec continues to monitor the COVID-19 situation and is pleased that the impact of the pandemic so far remains minimal. There has been tightening of labour availability to service projects due to ongoing domestic and international border restrictions; however, with generally high vaccination rates in Australia, these restrictions will be largely removed by the end of FY22.
EARNINGS REVISION/RISK
- Expect strong earnings growth of 18% for FY22, driven by the delivery of its huge orderbook and continued order wins. We expect Civmec to deliver an 18% y-o-y earnings growth of A$41m in FY22 and 3-year earnings CAGR of 15% from FY21-24, backed by a robust orderbook of A$1b as of end-FY21.
- Risks include:
- project cost overruns,
- inability to secure new contracts,
- unexpected drop-off in capex for mining and O&G sectors, and
- delay in and premature termination of projects.
VALUATION/RECOMMENDATION
- Maintain BUY and target price of S$0.98, pegged to 12x FY22F P/E (1 standard deviation below five-year mean). We think the current valuation of 9x FY22F P/E is attractive, given its strong growth profile of 15% 3-year EPS CAGR for FY21-24 and huge orderbook, especially in the defence sector which has a long tenure and high barriers to entry. Civmec’s peers are trading at an average of 22x FY21F and 15x FY22F P/E.
- See
SHARE PRICE CATALYST
- Earnings surprise due to higher-than-expected contract wins and margin.
- Better-than-expected dividend.
- Takeover offer by strategic shareholder given the high entry barrier of defence business.
John Cheong
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-10-29
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