As a leading contractor with a huge orderbook in defence and commodity sectors, Civmec is on track for record earnings in FY2022, says UOB Kay Hian Research analyst John Cheong.
In an Oct 18 note, Cheong is initiating coverage on Civmec with a “buy” call and a target price of 98 Singapore cents, which represents a 39% upside.
“Civmec is on track for record earnings in FY2022 as it delivers a A$1 billion ($1 billion) orderbook for clients in the defence and commodity sectors. We believe the market has overlooked the huge potential of its defence business, which just started in FY2021 and has high barriers to entry,” writes Cheong.
“Its resources and energy segments are set to enjoy stronger construction demand as clients seek to increase capacity amid high commodity prices,” adds Cheong.
Established in 2009, Civmec is one of Australia’s leading construction and engineering services provider to three key sectors: resources, energy and defence. Notable clients of Civmec include Chevron, Rio Tinto, Alcoa Australia, BHP, Thyssenkrupp and the Royal Australian Navy.
Civmec listed on the Singapore Exchange on April 13, 2012. Major shareholders in Civmec include executive chairman James Finbarr Fitzgerald and CEO and co-founder Patrick John Tallon. They each hold a 19.5% stake in the company.
See: KGI initiates coverage on Civmec with ‘outperform’, TP 86 cents, after stellar 9M results
Key projects completed include maintenance support of oil production facilities, construction of iron bridges for mining operations, construction of a lithium plant and construction of offshore patrol vessels (OPV).
In FY2021, Civmec delivered earnings growth of 94% y-o-y at A$34 million. Profit before tax across its three key segments — resources (up 65% y-o-y, contributing 87% of total), energy (up 205% y-o-y) and defence (up 51% y-o-y) — recorded robust growth.
“The favourable prices of oil, metals and minerals should continue to drive new construction demand, while the ramp-up of the defence business in FY2021 should accelerate Civmec’s future earnings growth,” writes Cheong.
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In April 2018, the Royal Australian Navy awarded a “huge” contract to Civmec and Lurssen Shipyard to construct 12 OPVs by 2029, notes Cheong. The contract is worth around A$3 billion and is part of the country’s A$89 billion continuous shipbuilding contract.
“We believe that Civmec was able to secure this contract as its facility in Henderson is the largest heavy engineering facility in Australia. Civmec started to build its first OPV in its Henderson yard in 2020, after the completion of the yard. The defence sector has high barriers to entry with only two players approved for shipbuilding, with the other being Australian Submarine Corp. The defence business should also boost net margin,” writes Cheong.
As at 1.47pm, shares in Civmec are trading flat at 72 Australian cents.
