Engineer. / Constr. & Drill & Blast

Transcription

1 Engineer. / Constr. & Drill & Blast GCS.asx SRG Global Ltd (GCS) SRG GLOBAL LTD (GCS) Restart with recommendation The GCS/SRG merger has completed. We re-start our coverage with a recommendation. As a reminder, the merger sees the GCS ticker survive, but the financial accounts will be on an SRG basis and the senior management team is predominantly SRG (with the Enzo Gullotti joining as an Exec-director). Hartleys expects Mergeco FY19 EBITDA $55.5m pro-forma There is no formal Company guidance, although work-in-hand for FY19 is $218m (excluding GCS). We assume FY19 pro-forma EBITDA of $55.5m and expect pro-forma normalised NPAT of $29.2m with 3.6cps DPS. We expect reported NPAT $20.8m (includes one-off transaction costs and only 10 months of consolidation). We assume FY20 EBITDA of $61.1m and reported NPAT of $33.0m with 3.6cps DPS. Twelve month price target $0.91/shr We view the merger as a sensible combination of complementary businesses. At the time the merger was announced, the Company highlighted five projects and the potential additional services that could have theoretically been provided had the merger occurred at the time the project was delivered. In addition to the revenue synergies, we view the scale increase as a significant advantage, allowing better capacity for the Company to invest in growth as well as the benefits that flow for a contractor that has a larger balance sheet. Additionally, the larger market capitalisation should broaden investor appeal. We re-start coverage with a and 12-mth target of $0.91. On our estimates, it implies GCS trades to FY20 EV/EBIT 7.4x and 5.7x EV/EBITDA. Fig. 1: Earnings Changes 6/18A 6/19F Profit & Loss ($m) actual Old New % diff Revenue % - mining SRG % - civil SRG % - acquired via merger % EBITDA % - margin 8.0% 8.7% 8.7% 0.0% Depreciation/Amortisation % EBIT % - margin 5.1% 6.6% 6.6% -0.2% Net Interest % Pretax Profit % - margin 4.8% 6.5% 6.5% 0.0% Tax % Norm. NPAT % - margin 3.5% 4.6% 4.6% 0.0% Minorities Abnormals (net of tax) Reported Profit % Net Debt (net cash) % Capex % DPS % Weighted Shares % Source: Hartleys Estimates. 26 Sep 2018 Share Price: $0.665 Valuation: $ mth price target: $0.91 Brief Business Description: Global specialist construction services for CBD, dams and bridges. Drill and blast services for Aust mining. Hartleys Brief Investment Conclusion Strong management team and high levels of revenue certainty. Merger of SRG/GCS.asx brings substantial scale. Chairman & CEO: Peter Wade (Chairman) Peter McMorrow (Deputy Chairman) David Macgeorge (MD) Enzo Gullotti (Exec-director) Substantial shareholders: Perennial (10.1%) CBA (5.7%) Company Address: Level 1, 338 Barker Rd Subiaco, WA, 6008 Issued Capital: - fully diluted Market Cap: - fully diluted Net Debt (30 Jun '18a): FY18a FY19e 440.4m 440.4m $292.9m $292.9m -$35.1m FY20e Op Cash Flw Free Cash Flw NPAT* (A$m) EPS ($, bas) P/E (basic) 19.6x 12.6x 8.9x P/E (diluted) 10.0x 8.9x EV / EBITDA 13.5x 4.6x 4.2x DPS (cps) Franking 100% 100% 100% Dividend Yield 3.9% 5.4% 5.4% N.D. / equity 0% -18% -19% Source: Hartleys Research. * normalised A$ M Oct-17 Global Construction Feb-18 Jun-18 Authors: Trent Barnett Head of Research Ph: E: trent.barnett@hartleys.com.au. Sep-18 Hartleys has completed a capital raising for SRG Limited ("SRG") and acted as Co- Adviser to the scheme of arrangement completed in September 2018 with Global Construction Services Limited within the past 12 months for which it has earned fees. See back page for disclaimers Volume - RHS Source: IRESS GCS Shareprice - LHS Sector (S&P/ASX SMALL INDUSTRIALS) - LHS Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 5 Terrace, Perth, Western Australia, 6000 Hartleys 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. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SRG Global Ltd (GCS) Recommendation: Company Information Profit & Loss ($m) 6/17A 6/18A 6/19F 6/20F Date 26 Sep 2018 Level 1, 338 Barker Rd Mining - Rev Share Price $0.665 Subiaco, WA, 6008 Mining - EBITDA Week High-Low $ $0.61 Ph: Mining - Margin 16.3% 16.5% 16.5% 16.5% Market Cap ($m) $292.9 Construction - Rev (100%) Enterprise Value ($m) $ Construction - EBITDA (100%) Ordinary Shares Construction - Margin 6.5% 7.5% 7.5% 7.5% Fully Diluted Shares GCS Revenue Group Revenue growth 29.4% 4.0% 166.6% 11.0% EBITDA margin 5.0% 8.0% 8.7% 8.6% 12mth fwd DCF (WACC 11.4%, Terminal growth 0.00%) $0.85 Reported EBITDA mth forward P/E base case earnings of 14x (peak-cycle) $1.07 Rep. Depreciation/Amortisation Jun19e 1x Price / NTA (1x $0.53) $0.53 Norm. EBIT mth fwd Div Yield of 4.5% (Gross yield=6.4%) $0.82 EBIT / Sales 2.8% 5.1% 6.6% 6.6% 12 Months Price Target (wgted avg above 4 avg) $0.91 Net Interest P / E (6/19F) at price target 13.7x Profit Before Tax P / E (6/20F) at price target 12.1x - margin 2.7% 4.8% 6.5% 6.6% EV/EBITDA (6/20F) at price target 5.7x Tax EV/EBIT (6/20F) at price target 7.4x Effective Tax Rate 32.3% 28.4% 29.0% 29.0% NPAT Pre Minorities Net Profit / Sales 1.8% 3.5% 4.6% 4.7% Multiples (S/price at $0.67) 6/17A 6/18A 6/19F 6/20F P / E (reported, basic weighted) 13.5x 19.6x 12.6x 8.9x Minorities P / E (normalised, dil. weighted) 10.0x 8.9x Normalised NPAT to equity P / E (mkt cap / norm. NPAT) 10.0x 8.9x Abnormals / discontinued P / E (fully diluted mkt cap / norm. NPAT) 10.0x 8.9x Reported Profit to equity Dividend Yield 4.2% 3.9% 5.4% 5.4% Group Free Cash Flow (f.c.f) / EV 0.4% 0.8% 11.8% 12.4% Reported EPS (basic, w'ghted) Equity f.c.f. / Mkt Cap -0.5% -0.3% 3.6% 9.2% Normalised EPS (weighted) Norm f.c.f. / Mkt cap -3.1% -3.1% 1.2% 5.7% Normalised EPS (full. diluted) Mkt cap / operating cash flow 42.1x 63.4x 7.8x 6.9x DPS (cps) EV/EBITDA multiple 22.6x 13.5x 4.6x 4.2x Franking 100% 100% 100% 100% EV/EBIT multiple 40.4x 21.3x 6.2x 5.5x Payout Ratio 57.2% 77.3% 68.4% 48.0% Price / Book Value 1.2x 1.2x 1.0x 0.9x Normalised payout 105.7% 53.5% 48.7% 48.0% Price / NTA 1.7x 1.9x 1.3x 1.2x Cashflow Statement ($m) 6/17A 6/18A 6/19F 6/20F Cash Receipts EBITDA Ratios 6/17A 6/18A 6/19F 6/20F Working Capital Change Return on Average Equity 5.1% 8.3% 14.1% 10.7% Cash from Operations Return on Assets 3.2% 4.9% 9.0% 7.1% Net interest Paid ND / ND + Equity -22.1% -0.1% -22.5% -23.8% Tax Paid ND / Equity -18.1% -0.1% -18.4% -19.2% Net Operating Cash Flow Net Interest Cover (EBIT) Capital Expenditure ROIC 6.9% 11.7% 17.8% 12.8% Asset Sales Other (inc Investments) Free Cash Flow Analysis ($m) 6/17A 6/18A 6/19F 6/20F Net Investing Cash Flow Net Operating Cash Flow Proceeds from Equity Issues Capex (Reported) Net Change in Debt & Leases Group Free Cash Flow (reported) Dividends Paid Fixed Debt Repayments Net Financing Cash Flow Equity Free Cash Flow (reported) Movement in Cash HP Lease Capex (non-cash) HP Lease Capex (non-cash) Free Cash Flow (normalised) Capex (inc HP) / depreciation 273% 154% 103% 145% Balance Sheet ($m) 6/17A 6/18A 6/19F 6/20F Cash Share Data 6/17A 6/18A 6/19F 6/20F Receivables Ord Issued shares (m) Inventories growth 1.9% 27.1% 117.9% 0.0% Other Weighted ave shares (m) Total Current Assets growth 1.5% 6.7% 133.8% 11.4% Property, Plant & Equipment Diluted shares wgted (m) Intangibles growth 10.8% 0.0% 128.5% 11.4% Other Unpaid Capital Total Non Current Assets Year Expires Number % ord Avg Price $m unpaid Total Assets Jun % $ - $ - Accounts Payable Jun % $ - $ - Interest Bearing Liabilities Jun % $ - $ - Other Jun % $ - $ - Total Current Liabilities Jun % $ - $ - Accounts Payable TOTAL - 0.0% $ - $ - Interest Bearing Liabilities Directors & Senior Management Subs. S/holders Other Peter Wade (Chairman) Perennial 10.1% Total Non Current Liabilities Peter McMorrow (Deputy Chairman) CBA 5.7% Total Liabilities David Macgeorge (MD) Net Assets Enzo Gullotti (Exec-director) Net Asset Value / Share ($) Peter Brecht (non-exec) NTA / Share ($) Michael Atkins (non-exec) Net Debt (net cash) John Derwin (non-exec) Roger Lee - CFO Analyst: Trent Barnett Phone: Sources: IRESS, Company Information, Hartleys Research Last Earnings Estimate Changes: 26 September 2018 Page 2 of 5

3 Fig. 2: Earnings Changes 6/18A 6/19F 6/20F Profit & Loss ($m) actual Old New % diff Old New % diff Revenue % % - mining SRG % % - civil SRG % % - acquired via merger % % EBITDA % % - margin 8.0% 8.7% 8.7% 0.0% 8.6% 8.6% 0.0% Depreciation/Amortisation % % EBIT % % - margin 5.1% 6.6% 6.6% -0.2% 6.8% 6.6% -2.4% Net Interest % % Pretax Profit % % - margin 4.8% 6.5% 6.5% 0.0% 6.7% 6.6% -2.1% Tax % % Norm. NPAT % % - margin 3.5% 4.6% 4.6% 0.0% 4.8% 4.7% -2.1% Minorities Abnormals (net of tax) Reported Profit % % Net Debt (net cash) % % Capex % % DPS % % Weighted Shares % % Source: Hartleys Estimates, IRESS PRICE TARGET Our twelve month price target is $0.91. SRG Price Target Methodology Weighting Spot 12 mth out DCF (WACC 11.4%, Terminal growth 0.00%) 25% $0.81 $ mth forward P/E base case earnings of 14x (peak-cycle) 25% $1.04 $ mth forward EV/EBIT of 6x (mid-cycle) 25% $0.72 $ mth forward EV/EBIT of 12x (peak-cycle) 5% $1.30 $1.45 Jun19e 1x Price / NTA (1x $0.53) 1% $0.53 $ mth fwd Div Yield of 4.5% (Gross yield=6.4%) 19% $0.80 $0.82 Risk weighted composite $0.86 $ Months Price Target $0.91 Shareprice - Last $ mth total return (% to 12mth target + dividend) 42% Source: Hartleys Estimate Page 3 of 5

4 Fig. 3: Key assumptions and risks for valuation Assumption Group Revenue reaches ~$850m by FY23 Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment High High The outlook for the industry suggests that this is achievable EBITDA margins ~ % Moderate to High High Appears reasonable but implies improving core margins Capex is low Moderate Moderate GCS is predominantly a services business, and hence capex is low. Note, the drill & blast division is capital intensive, and hence there will be an eventual capex replacement cycle. No substantial acquisitions High Upside / Downside We believe that it is likely GCS makes further acquisitions Conclusion We believe our assumptions are reasonable. Source: Hartleys RISKS The key risks for GCS (like most industrial companies) is earnings disappointments given the industry is volatile and earnings can disappoint due to cost overruns, project delays, loss of contracts or slower than anticipated new project wins. Although some earnings disappointments can be short term and just a timing issue, other disappointments can be materially value destructive and can sometimes overhang stocks for a long period of time (for example contract disputes). Such disappointments can be very difficult to predict and share price reactions can be severe and immediate upon disclosure by the company. High financial leverage can increase the impact. EV/EBIT BANDS Fig. 4: EV/EBIT Band Shareprice GCS Actual Hartleys Target 12x EV/EBIT 10x EV/EBIT 8x EV/EBIT 6x EV/EBIT 4x EV/EBIT SRG shareprice and financials prior to FY19 Source: Hartleys Estimates Page 4 of 5

5 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Oliver Stevens Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Director Stephen Kite Director Scott Weir Director Scott Stephens Associate Director Rhys Simpson Associate Director Registered Office Level 6, 141 St Georges Tce Postal Address: Perth WA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner: firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Digby Gilmour Jayme Walsh Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has completed a capital raising for SRG Limited ("SRG") and acted as Co-Adviser to the scheme of arrangement completed in September 2018 with Global Construction Services Limited within the past 12 months for which it has earned fees. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 5 of 5