Civmec Limited - DBS Research 2022-09-02: Expansion Plan A Positive Signal

Civmec's FY22 Results Highlights

FY22 revenue and net profit at record highs.

• Civmec (SGX:P9D)'s FY22 revenue reached A$809.3m, up 20% y-o-y, in line with our estimates. FY22 net profit is at A$50.8m, up 46% y-o-y, which beat our estimates by 9%.
• FY22 net profit margin of 6.3% (FY21: 5.2%) was above our estimate and management’s guidance of 6.0%. This was attributed to effective cost controls on administrative expenses.

Healthy project and gross margins maintained, despite rising costs.

• FY22 gross margins were at stable levels at 11.2% (FY21: 11.1%) despite rising costs (e.g., raw materials, fuel, labour, and more), suggesting that cost pressures were well managed over the year.
• Additionally, 2H22 gross margin inched up to 11.6% (1H22: 10.8%, 2H21: 11.0%), which is at a four-year high. Management believes that raw material costs have reached its peak, which should bode well for future project/gross margins.

Dividend surprise of AUD 3 cents, in lieu of the strong results, which translates to a dividend yield of 4.5%.

• The A$0.03 (FY21: A$0.02) dividend declared is above our expectations, and above management’s guidance of A$0.02. This translates to a dividend payout ratio of 30% (FY21: 29%) from Civmec in FY22. See Civmec's Dividend History.

Positive operational updates.

• The land purchase of Civmec’s recently announced facility in Port Hedland has been settled and the company will be seeking to develop the facility over the next 12 months.
• Separately, Civmec has secured IRATA certification, which enables the group to provide rope access services to its clients, thereby expanding its service offerings.

Expansion plans a positive signal.

• Civmec intends to acquire a 28,510 square metre land holding in Gladstone, Queensland to establish a permanent facility. This facility will replace the leased facility that Civmec currently occupies and will allow the group to expand its service offerings in the region, more specifically into maintenance-related projects.
• Notable projects and customers in the vicinity include alumina refineries, coal export terminals, cement players, and more. Thus far, Civmec has been involved in projects in the region, albeit at a smaller scale. This acquisition will solidify Civmec’s presence and leadership in the region and enable Civmec to play a larger role in projects in the region going forward. Capex earmarked for this acquisition is guided to be A$10m.

Healthy balance sheet.

• Civmec’s FY22 NAV per share has grown to A$0.74, up 28% y-o-y from A$0.58 in FY21.
• Separately, Civmec is also able to maintain healthy balance sheet with a FY22 debt-to-equity ratio of 0.09x (FY21: 0.04x).

Healthy customer capex amid a growing addressable market.

• Customer capex (including maintenance opportunities) from the mining, energy, infrastructure, marine, and defence sectors is estimated to grow by 9% y-o-y by FY24F, with > A$110bn in customer capex estimated per year, suggesting there’s room for an upside to orderbook growth.

Labour availability as a cap for growth.

• Although there is a possible upside for orderbook growth, Civmec's management has guided that they are maintaining a cautious approach in bidding for orderbooks due to concerns over labour shortages. Whilst labour market conditions in Australia have improved since the COVID-19 pandemic, labour supply has not returned to pre-COVID levels yet, which, in our view, could cap near-term orderbook growth.

Our view

Modest revenue growth, with improved gross margins and steady net margins.

• We forecast modest revenue growth of 5%/9% for Civmec in FY23 and FY24 respectively, with a modest growth of 9% in the orderbook for FY23F. We also assume project/gross margins would improve to 11.5% (FY22: 11.2%). Although, we assume marginal increases in operating expenses to 2.7% (FY22: 2.3%) as we consider higher labour and R&D costs.
• Overall, we assume Civmec's net margins will remain stable at 6.3% for FY23/24F (FY22: 6.3%), which is in the upper limit of management’s latest guidance of 5.5%-6.5% going forward.
• Going forward, we anticipate Civmec to continue paying investors a steady dividend of A$0.03, which translates to a dividend payout ratio of 28% and 26% for FY23 and FY24 respectively.

Civmec - Valuation & Recommendation

• Maintain BUY recommendation on Civmec with revised target price of S$0.92, based on our FY23F EPS and forward P/E of 9.0x (unchanged).
• Civmec's share price is currently trading below its book value (FY22 NAV per share of A$0.74 cents) and below its peers’ average of 11.5x. In our view, higher-than-expected orderbook growth as labour markets in Australia improve, can catalyse an upwards rerating of Civmec's share price,