DBS Group Research analyst Paul Yong is keeping his “buy” call on Civmec with a higher target price of 92 cents from 88 cents after the company posted record results for the FY2022 ended June.
The new target price is based on Yong’s earnings per share (EPS) estimates for the FY2023 and an unchanged forward P/E of 9.0x.
On Aug 29, the dual-listed construction and engineering services provider reported earnings of A$50.8 million ($48.8 million) for the full year, 46% higher y-o-y and surpassing estimates.
Civmec’s revenue for the FY2022, which increased by 20.0% y-o-y to A$809.3 million, was also a record and in line with Yong’s estimates for the full year.
In addition, the company reported a surprise dividend of 3 Australian cents in lieu of the strong results, translating to a dividend yield of 4.5%.
The dividend declared is also above Yong’s expectations and above Civmec’s management’s guidance of 2 Australian cents.
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“Civmec is entering FY2023 with a robust order book of A$1.04 billion, a 3% y-o-y increase, and has maintained steady gross margins in FY2022 of 11.2% (from FY2021’s 11.1%) and robust net margins of 6.3% (from FY2021’s 5.2%), despite rising costs over the year,” says Yong.
Despite its robust financials, however, the company is trading at an FY2023 forward P/E ratio of 6.4x, which is a steep discount compared to its peers’ average of 11.5x.
“In our view, Civmec’s relative discount is unwarranted, given its higher earnings growth and margins,” the analyst writes.
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Further to his report, Yong likes that the company is “well positioned” in traditional economy sectors such as energy, resources, infrastructure and defence.
“By the FY2024, customer capital expenditure (capex) from these sectors is estimated to have a 9% CAGR,” the analyst notes.
“Australia’s government aims to deliver over A$120 billion in infrastructure investment over 10 years and has pledged to invest A$183 billion by 2050 in naval shipbuilding, with Civmec as one of the few approved players,” he says.
“We like Civmec’s diversified revenue streams from both private and public sector capex. We view Civmec’s upcoming expansion plan in Gladstone, Queensland as a positive signal for its outlook,” he adds.
In addition, Yong is buoyant on Civmec’s prospects as a potential beneficiary to the increasing number of lithium and hydrogen energy projects in Australia.
This is given the company’s established relationships with leading industry players such as Rio Tinto and Chevron.
“Civmec recently won a major contract to build a refinery related to electric vehicle (EV) batteries, due in 2024,” the analyst points out.
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Looking ahead, Yong is forecasting Civmec to report modest revenue growth of 5% for the FY2023 and 9% for the FY2024 on the back of its record FY2022 results.
He also sees the company logging a modest growth of 9% in the order book for the FY2023.
“We also assume project/gross margins would improve to 11.5% (from FY2022’s 11.2%),” the analyst adds, even though he has also estimated marginal increases in operating expenses to 2.7% (from FY2022’s 2.3%) as he factors in the higher labour and R&D costs.
“Overall, we assume net margins will remain stable at 6.3% for FY2023/FY2024, which is in the upper limit of management’s latest guidance of 5.5%-6.5% going forward,” says Yong.
“Going forward, we anticipate management to continue paying investors a steady distribution per share (DPS) of 3 Australian cents, which translates to a dividend payout ratio of 28%/26% for FY2023/FY2024,” he adds.
Maybank Securities analyst Eric Ong has also kept his "buy" call as Civmec's 2HFY2022 net profit exceeded his expectations.
"Excluding the write-back of A$1.3 million for the previous impairment/revaluation losses, FY2022 core earnings of A$49.5m came in at 105% of Maybank's/consensus’ full-year estimates," Ong writes.
Amid Civmec's stellar performance, Ong has raised his EPS estimates for the FY2023 to FY2025 by 1%-2% on the back of a stronger net margin assumption. He has, however, retained his target price of $1 given the depreciating AUD against the SGD.
In his report, Ong has forecasted a revenue CAGR of about 9% over the next three years driven by "strong tendering activity".
"Maintenance work is recurring in nature and accounted for more than 25% of the group’s revenue in FY2022," he writes.
In addition, the analyst expects Civmec to turn to net cash in the FY2024 due to the normalised level of capex, which could translate into higher dividends from the company.
Shares in Civmec closed 0.5 cent higher or 0.78% up at 64.5 cents on Sept 2.
