KGI Research has remained positive on Civmec as it deems the counter a “value stock” with “strong fundamentals and growth opportunities”.
In her report on March 1, analyst Megan Choo has kept her “outperform” call on Civmec as Civmec posted a strong set of financials for the 1HFY2022 ended December.
For the half-year period, Civmec reported a 50.4% y-o-y growth in earnings of A$22.6 million ($22.3 million). Revenue for the same period improved 27.4% y-o-y to A$389.4 million.
Despite the positive outlook, Choo has lowered her target price on the counter to 79 cents from 89 cents previously, due to the overall de-rating of valuation multiples across the sector.
According to Choo, her new target price is based on Civmec’s FY2022 P/E of 10x, down from its previous 12x.
The way Choo sees it, Civmec is in a good place to benefit from Australia’s spending on public infrastructure and defence.
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“Supported by public funds, investment in these sectors is expected to ramp up over the next few years,” she writes.
The Australian government is looking to invest A$110 billion over 10 years from 2021 to 2022 in land transport infrastructure across the country.
This will be done through its rolling infrastructure pipeline, most of which is under the Infrastructure Investment Programme.
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“Since last year’s defence budget, the estimated Major Capital Investment Programme figures across 2020–2021 have somewhat reduced, by around a billion dollars each year. However, by 2022–2023, the programme budget is expected to ramp up to A$14.5 billion,” says Choo.
The strong demand for commodities is also another positive for Civmec, which provides multi-disciplinary services to the oil & gas, metals & minerals, infrastructure, as well as the marine & defence sectors.
“The prospect of a war involving Russia, the largest supplier of gas and oil to Europe, has rattled markets and fuelled fears of higher oil prices. In addition, decarbonisation is becoming a material demand driver for several metals, such as aluminium, copper and lithium as internal combustion engine vehicles are replaced by battery-pack driven electric ones, and clean energy installations (such as wind and solar farms) proliferate,” writes Choo.
While the resilient demand for commodities, recurring revenue from maintenance and capital works, as well as the growth in Australian infrastructure and defence spending are key catalysts for the company’s growth, investors should look beyond Civmec as a pure commodity play, but rather a company with solid fundamentals and other potential growth opportunities, says the analyst.
“As revenue is recognised upon contractual fulfilment, it will be more meaningful to consider outstanding order book. Civmec’s order book stood at A$1.19 billion as of 1HFY2022, while contract assets rose 25.8% to A$103.9 million. The current strength in commodity prices reflect further potential order book growth moving forward which will translate to revenue in due time,” she writes.
Looking ahead, Choo has increased her revenue forecasts for the FY2022 upwards due to its “outstanding” earnings for the 1HFY2022.
“FY2022 energy segment revenue annual growth rate was revised from 6% y-o-y to 25% y-o-y while infrastructure and defence segment growth was revised from 8% y-o-y to 30% y-o-y,” she says. Her forecast for the resources segment forecast was left unchanged. She has also revised her gross margin forecast to 10.8%, down 0.5 percentage points from FY2021, after factoring in lower margins in 1HFY2022. Other assumptions within the income statement remained unchanged, she adds.
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Going into the second half of the year, Choo estimates that Civmec could see upside potential in its energy segment due to the robust oil and gas prices. To be sure, WTI Crude futures reached a seven-year high on Feb 24, while Brent Crude futures hit US$100 ($135.67) per barrel for the first time since September 2014.
“Resources segment revenue is expected to register steady growth, given that certain metal prices are on a path to recovery while some are outperforming. Infrastructure and defence segment is also expected to outperform, in tandem with an increase in public funding related to these segments. Overall revenue is buoyed by recurring income from the maintenance and capital works division, which is yet another area for expansion moving forward,” says Choo.
Shares in Civmec closed 2.5 cents higher or 3.94% up at 66 cents on March 3, or an FY2022 P/B of 1.0x and dividend yield of 3.1%.
