Australia-based engineering and construction company Civmec’s overall prospects are brightening, as seen from its growing order book that has crossed over A$1 billion, including A$120 million worth announced on May 25.
On May 11, Civmec, which is dual-listed in Australia, reported 3QFY2022 ended March earnings of A$21.1 million, up 35.7% y-o-y, bringing its 9MFY2022 earnings to A$34.7 million, up 45% y-o-y.
In his May 23 report, DBS Group Research’s Paul Yong initiated a “buy” call on the stock with a target price of 88 cents. He notes that Civmec is now trading at a FY23 forward P/E ratio of 6.6x, which is a discount relative to its peers’ median of around 9x. “In our view, Civmec’s discount is unwarranted, given its higher earnings growth and margins relative to its peers,” writes Yong.
Maybank Securities’ Eric Ong, meanwhile, was already bullish on this stock earlier. He initiated coverage on May 6 with a “buy” call and $1 target price — which was reiterated in his follow-up report on May 19. The $1 target price is pegged to 10x FY2023 estimated earnings.
Yong says Civmec is well-positioned in so-called traditional economic sectors such as energy, resources and infrastructure. Civmec, as one of the few approved builders of naval vessels in Australia, enjoys business from the defence sector too. By FY2024, customer capital expenditure from these sectors is estimated to grow by a 9% CAGR.
A big chunk of the spending will come from the Australian government, which has laid down plans to invest A$120 billion in infrastructure over 10 years. The Australian government has also pledged to invest A$183 billion by 2050 in naval shipbuilding. “We like Civmec’s diversified revenue streams comprising both private and public sector capex, with public spending typically kicking in during economic downturns, which can support order book growth in these periods,” writes Yong.
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“We believe Civmec’s strategic proximity, fabrication expertise, and vertically integrated capabilities position it as a potential beneficiary of its customers’ growing capex,” he adds.
For FY2021, Civmec’s resources segment contributed 83% of its total revenue, infrastructure and defence at 11% and, lastly, energy at 6%.
The way Yong sees it, Civmec has a few positive aspects in its favour. First, there is an ongoing boom in commodities which has encouraged private companies to commit more capex, seen by BIS Oxford Economics to grow at 8% CAGR to FY2024. According to his analysis, there is a strong positive correlation of 0.75 between Australia’s private investments and Civmec’s share price.
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Yong sees Civmec enjoying a lift from so-called new economy sectors as well. Australia is home to an increasing number of lithium and hydrogen energy projects. Civmec, given its established relationships with leading industry players such as Rio Tinto and Chevron, is a potential beneficiary. “Civmec recently won a major contract to build a refinery related to electric vehicle (EV) batteries, due in 2024,” notes Yong.
The strong order book suggests gains in share price too. According to Yong, there is a strong positive correlation of 0.93 between Civmec’s order books and its share price. In FY2019, Civmec’s order book was around A$0.8 billion. It increased slightly to A$0.9 billion the following year and enjoyed a bigger jump to A$1.1 billion for FY2021. As at March 2022, Civmec maintained a robust order book of A$1.07 billion, which would drive steady earnings for FY2022/2023F and beyond.
Citing Civmec’s management, Yong notes that for the period to FY2025, there will be some A$60–80 billion in customer capex per year that Civmec can try to win. “We anticipate room for growth in Civmec’s order book vis-à-vis growing industry capex,” he adds.
Last but not least, Civmec has been winning significant businesses from maintenance works too. The recurring nature of this income stream helps with Civmec’s earnings visibility.
Again, citing BIS Oxford Economics, Civmec’s maintenance opportunities are expected to double from around A$9 billion in FY2021 to around A$18 billion in FY2025. Yong notes that as at FY2021, this proportion of maintenance revenue was already 25% of Civmec’s total. Civmec expects this proportion to reach 40% in the coming years.
Yong adds that Civmec enjoys a potential “economic moat” thanks to its strategically located existing facilities believed to be the largest undercover seafront fabrication and modular assembly facilities. Yong’s target price of 88 cents is pegged to a forward P/E ratio of 9x, in line with Civmec’s peers’ median — specifically those with a market value of less than $1 billion, as well as Civmec’s own historical four-year median forward P/E ratios.
“Order book and earnings surprises could catalyse an upwards re-rating of Civmec’s share price towards its median forward PE ratios,” says Yong.
Key risks flagged by Yong include Civmec’s dependency on a small number of industries/customers; non-recurring nature of projects; competition for projects and skilled labour; as well as raw material price surges and labour shortages.
