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UOB Kay Hian maintains 'buy' call for Civmec with higher TP of $1.18

Bryan Wu
·3-min read

The brokerage is positive on the company’s future growth as its FY2022 earnings surpassed its expectations.

UOB Kay Hian analyst John Cheong has maintained his “buy” call for Civmec with an increased target price (TP) of $1.18 from $1.08 previously, with the company’s contract wins and improved margins.

The dual-listed Singaporean-Australian construction engineering company’s FY2022 net profit of A$51 million ($48.7 million), a 47% year-on-year (y-o-y) increase, surpassed Cheong’s expectations by 13% due to robust revenue growth across most sectors and net margin expansion. Civmec’s FY2022 ended in June.

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Dividends also exceeded the analyst’s expectations by 20%, with a full-year dividends per share (DPS) of 3 Australian cents, a 50% y-o-y increase, representing a dividend yield of 4.7%.

Revenue grew 20% y-o-y, with Civmec’s infrastructure & defence segment growing 95% y-o-y and its resources segment growing 13% y-o-y, offsetting the 21% y-o-y decrease from its energy segment.

Civmec’s ebitda margin expanded by 0.8% points while net margin grew 1.2% points, mainly due to better operating leverage and more favourable contract terms as most of Civmec’s customers in the resources industry are making good profit, says Cheong

He notes that Civmec remains positive on its future outlook given the strong tendering opportunities across all the sectors in which it operates. His TP of $1.18 is pegged to 12x FY2023 price-to-earnings ratio (P/E), 1 standard deviation (s.d.) below the five-year mean.

“We think the current valuation of 6x FY2023 P/E is attractive, given its strong growth profile of 10% three-year earnings per share (EPS) compound annual growth rate (CAGR) for FY2022 to FY2025 and huge orderbook, especially in the defence sector which has a long tenure and high barriers to entry,” says the analyst, who notes that Civmec’s peers are trading at an average of 15x FY2022 P/E.

He has raised his FY2023 and FY2024 earnings forecasts by 16% and 12% respectively, after raising his revenue estimates by 4% for both years. Cheong’s gross margin estimates have also risen around 0.2% points to 11.5% and 11.7% respectively to reflect more contract wins and better margins that Civmec should enjoy given the more favourable commodity prices which will benefit the majority of its customers.

“Tendering activity remains strong across all the sectors that Civmec operates in and it is focused on securing projects that will grow its workforce at a sustainable rate. Civmec remains positive about the pipeline and the opportunities to continually replenish its orderbook,” says Cheong, who adds that the company is also increasingly focused on growing the proportion of revenue earned on long-term contracts.

Meanwhile, Civmec has two new facilities under development to support growth, including its previously announced facility in Port Hedland which has recently settled the land purchase and gained development approval. The facility will be developed over the next 12 months.

In addition, Civmec has acquired a 28,510 sqm piece of land in the region to establish a permanent facility. This facility will replace the leased facility Civmec currently occupies and allow it to expand its service offerings in the region, says Cheong.

The analyst also points out that Civmec is well-positioned to tap on emerging opportunities in the clean and new energy segments, progressing well on ​​the construction of its lithium plants with more hydrogen projects expected on the horizon as the hydrogen industry picks up traction in Australia.

Cheong’s share price catalysts include an earnings surprise due to higher-than-expected contract wins and margin, better-than-expected dividends and a takeover offer by a “strategic shareholder” given the high barrier-to-entry of the defence business.

As at 3.43pm, shares in Civmec were trading 1 cent or 1.55% up at 66 cents.

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