Civmec - DBS Research 2022-05-23: Two (Growth Engines) Is Better Than One


Civmec - Two (Growth Engines) Is Better Than One

  • Civmec (SGX:P9D) is a leading integrated and multi-disciplinary construction and engineering services provider based in Australia.
  • Civmec provides heavy engineering and other services including fabrication, site civil works, precast concrete, and maintenance services to the energy, resources, infrastructure and defence sectors. As at FY21A, the resources segment contributed 83% of the group’s revenue, infrastructure and defence at 11% and, lastly, energy at 6%.

Civmec - Investment Summary

Commodity supercycle has spurred private capex, which is forecasted to grow at an 8% CAGR by FY24F.

  • Strong global demand in 2022 has elevated commodity prices and spurred private industry capex. According to BIS Oxford Economics, capex in energy and resources sectors is estimated to grow by an ~8.0% CAGR by FY24F.
  • We note a strong positive correlation of 0.75 between Australia’s private investments and Civmec's share price, for which, we believe, the robust private capex is likely to bode well.

Public capex expenditure to support growth during economic downturns.

  • Based on the recent Federal Budget 2022, Australia’s government aims to deliver over A$120bn in its infrastructure investment pipeline over the next 10 years. Additionally, the Australian Government has committed to invest A$183bn by 2050 in naval shipbuilding, with Civmec as one of the few approved players.
  • According to BIS Oxford Economics, total customer capex (including infrastructure and defence sectors) is estimated to grow by a ~9.0% CAGR by FY24F.
  • We note a strong positive correlation of 0.75 between government gross fixed capital formation vis-à-vis Civmec's share price.
  • Civmec’s status as a Tier 1 contractor with strong barriers to entry in Australia’s defence segment positions the group to tap into the boom in civil infrastructure and defence spending.

Robust orderbooks to bring steady income for FY22/23F and beyond, with room for further growth.

  • We note a strong positive correlation of 0.93 between Civmec’s orderbooks and its share price. Civmec’s orderbook grew from ~A$0.8bn in FY19A to A$0.9bn in FY20A and A$1.1bn in FY21A.
  • As at Mar 2022, Civmec maintains a robust orderbook of A$1.07bn, which would drive steady earnings for FY22/23F and beyond. Furthermore, till FY25F, management estimates A$60-80bn in yearly customer capex that can be targeted by Civmec.
  • We anticipate room for growth in Civmec’s orderbooks vis-à-vis growing industry capex.

New economy sectors as additional levers of growth.

  • Australia is home to an increasing number of lithium plants and hydrogen projects. Given Civmec’s established relationships with notable energy players, we believe the group is well positioned to tap into such opportunities.
  • Separately, Civmec recently won a major contract to build a refinery in Western Australia to convert lithium concentrate into a high-purity compound used for making EV batteries.

Maintenance and capital works (MCW) segment to contribute greater recurring income.

  • According to BIS Oxford Economics, maintenance opportunities are expected to double from ~A$9bn in FY21A to ~A$18bn in FY25. As at FY21A, it is estimated that ~25% of the group’s revenue was contributed by its MCW segment, in which management targets to reach 40% in the coming years.
  • By FY25F, we estimate Civmec’s revenue to reach ~A$1bn, with a strong contribution from Civmec’s MCW segment, which translates into an estimated 9% CAGR in earnings between FY22-25F.

Potential economic moat arising from its facilities and strategic location.

  • Civmec believes the group has the largest undercover seafront fabrication and modular assembly facilities. The group’s strategic location near Australia’s key oil and gas, mining, resource, and marine centres, complemented by its fabrication expertise and vertically integrated capabilities, positions it to tap into the growing capex of these sectors.

Civmec - Investment recommendation

Paul YONG CFA DBS Group Research | Singapore Research Team DBS Research | https://www.dbs.com/insightsdirect/ 2022-05-23
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