Duratec Limited

Company Overview: Duratec Limited (ASX: DUR) is an Australia based company, involved in providing assessment, protection, remediation and refurbishment services to a range of assets, particularly steel and concrete infrastructure. The company operates mainly through four segments: Defence, Mining & Industrial and Buildings & Facades, and Others - Power & Energy, Marine, Transport and Water infrastructure. DUR got listed on ASX on 4^th November 2020.

DUR Details

New Contracts Gain to Support Topline Growth:

• DUR attained three new contracts in the month of June 2022, which is expected to add value to the FY23’s revenue. With the attainment of the new contracts, the orderbook has reached out to $470 million and tendered works of $446 million, within an overall $1.6 billion pipeline of tangible opportunities, as of 13^th June 2022.

Contracts Summary (Source: Analysis by Kalkine Group)

Key Takeaways of First Half-Yearly Results 2022:

• Top Line: The company’s overall revenue hiked ~5.5% Y-o-Y to $130.9 million, where the investment in DDR Australia Pty Ltd (49% ownership) led to the contribution of 7%.
• Bottom Line: COVID-19 related project productivity impacted the margins and statutory NPAT margin slipped currently to 0.6%, from 3.7% in 1HFY21. However, despite of labour constraints, COVID-uncertainties and supply chain constraints, the company still managed to generate statutory NPAT of $0.7 million in 1HFY22 as compared to $4.6 million in 1HFY21, a ~84.4% decline on pcp basis.

Top 10 Shareholders: The top ten shareholders together form around 69.40% of the total shareholding, while the top 4 constitute the maximum holding. Ertech Holdings Pty. Ltd. and Oates (Christopher John) are holding a maximum stake in the company at ~19.68% and ~11.07%, respectively, as also highlighted in the chart below:

Source: Analysis by Kalkine Group

Key Metrics: With cash flows from operations of $2.1 million, DUR has a cushioning cash balance of $36.20 Mn in 1HFY22. With the total Debt of $13.2 million, its debt-to-equity ratio slightly increased to 0.54x in 1HFY22 as compared to 0.52x in 2HFY21.

Liquidity and Debt Profile (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company could be affected by the lockdown regulations and restrictions, impacting sales and operations. Financial performance got adversely affected by COVID-19 project shutdowns on the east coast.
• Supply Chain Risks: Considering the market volatility the company might face supply chain risks like rising costs of materials and freight.
• Labour Supply: The business’ operations are also dependent on the labour availability market, and the industry faced wage/salary pressures.

Outlook: As released in the 1HFY22, the company seems to be well placed to capture the opportunities the defence market segment has to offer, where the sustainment spending forecast is expected to increase from ~$13 billion to ~$24 billion to FY30. Its Buildings & Facades segments’ work on hand includes 10 significant building facades projects and looks like operating on a good momentum with increasing demand for Duratec’s Technical Team and ECI in projects. Various significant projects will be undertaken in H2FY22, which includes the commencement of Western Sydney Airport fuel infrastructure project. The company’s recent investment in DDR Australia Pty Ltd increased project pipeline over the past 6 months and reported a decent outlook with current work on hand of $57.2 million and $304.9 million of identified opportunities. DUR recently attained three new contracts in June 2022, which is expected to add value to the FY23’s revenue. The contracts further enhanced the orderbook to $470 million and tendered works of $446 million, within an overall $1.6 billion pipeline of tangible opportunities, as of 13^th June 2022.

Technical Commentary: On the daily chart, DUR stock prices are hovering around the horizontal trend line support level and trading above the trendline. Moreover, the momentum oscillator RSI (14-period) is showing a reading of ~43.225 level, which might indicate the possibility of a rebound in the prices. However, the prices are trading below the trend-following indicator 21-period SMA, which may act as a resistance zone. An important support level for the stock, is placed at AUD 0.290 while the key resistance level is placed at AUD 0.380.

Stock Recommendation: The stock of DUR has corrected ~9.58% in the past six months and ~7.04% in the past one month, and currently trading below its average of 52-week low and high of $0.295 - $0.530, respectively. Moreover, the stock is trading at EV/Sales multiple of 0.2x as compared to the industry average (Construction and Engineering) of 6.1x on a TTM basis, thus seems undervalued. Considering stock’s trading at lower levels, attainment of new contracts, forecasted market with rising orderbook, decent topline growth in 1HFY22, indicative valuation on a TTM basis, decent liquidity position, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.330, as on 17^th June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DUR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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