Intega Group Limited

Company Overview: Intega Group Limited (ASX: ITG) operates a Quality, Testing and Measurement business that provides construction material testing, subsurface utility engineering services and quality assurance for energy companies. ITG was demerged from Cardno Limited and started trading on ASX in November 2019. The company derives its revenue from 4 divisions, namely construction sciences, RABA KISTNER, Quality & Engineering and T2 Utility Engineers.

ITG Details

Decent Increase in Revenue and Stable Balance Sheet: Intega Group Limited (ASX: ITG) operates a Quality, Testing and Measurement business that provides construction material testing, subsurface utility engineering services and quality assurance for energy companies. ITG was demerged from Cardno Limited and started trading on ASX in November 2019. As on 4 September 2020, the market capitalization of the company stood at ~$129.13 million with PE multiple of 19.33x.

During FY20, ITG performed ahead of prior year pro forma results and finished the year with a decent balance sheet despite the challenges offered by COVID-19 pandemic. During FY20, gross revenue of the company went up by 8.2% to $452 million on a pro forma basis, and net revenue was $334.0 million, up 8.1% on prior year on a pro forma basis. EBITDA, excluding the impact of AASB 16 and including proforma acquisitions was up by 3.7% on the prior year to $30.9 million and reported a net operating profit after tax of $5.2 million. Growth has been primarily driven by strong infrastructure during the year and decent oil and gas markets in the first half.

During the year, the business showed resilience and demonstrated flexibility due to a diversified portfolio across a large number of geographies. It has built strong cash reserves across divisions, with no material assistance from the Government initiatives. The company has strengthened its client base, relationships with vendor and shareholders and seems to be well-positioned to benefit from the upcoming growth opportunities. During FY20, the company reported a decent balance sheet with a decrease of $19.8 million in net debt to $46 million and an operating cash balance of $37.1 million, excluding AASB 16. This was driven by continued focus on cash increase by managing its working capital and strong invoicing and collections processes.

During the lockdown period, ITG was considered as an essential service with usual business operations, which resulted in manageable financial and operational impacts. The company deployed remote working strategies and focused on financial agility by implementing weekly operational updates, cash forecasting, reporting and increased focus on working capital management. The company strengthened its cash position through an effective tightening of working capital management. The company undertook business development and marketing to replace projects in key geographies.

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Intega Group Limited. Crescent Capital Partners Ltd. is the largest shareholder in the company, with a percentage holding of 48.95%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Decent Cost Management and Financially Stable Balance Sheet: During FY20, gross margin of the company stood at 85.6%, higher than the industry median of 14.7%. In the same time span, net margin of the company witnessed an increase over the previous year and stood at 1.4%, up from 1.2% in FY19. Higher gross margin and an improvement in the net margin indicate that the company is well managing its costs and is capable of converting its revenue into profits. During FY20, EBITDA margin of the company stood at 7.4% as compared to 6.5% in FY19, indicating increased profitability. In the same time span, Return on Equity of the company was 4.5%. During the year, current ratio of the company stood at 1.68x, higher than the industry median of 1.09x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. In the same time span, assets/equity ratio of the company was 2.51x, lower than the industry median of 4.73 and debt/equity ratio of the company stood at 0.95x, reflecting a decline from 1.37x in the previous year. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.

Key Margins (Source: Refinitiv, Thomson Reuters)

Revenue Model: The company derives its revenue from 4 divisions, namely construction sciences, RABA KISTNER, Quality & Engineering and T2 Utility Engineers. The construction sciences division provides construction material testing, environmental testing, and geological engineering. It contributed the growth of 0.4% in gross revenue and reported an EBITDA margin of 10.2%. T2 Utility Engineers provides utility mapping, coordination, design, and surveying. It reported a growth of 4.6% in gross revenue and EBITDA margin improved by 2.4% from 1H20 to 2H20. RABA KISTNER provides project management and quality assurance and inspection services. During FY20, the division reported a growth of 17.5% in gross revenue because of increases in the infrastructure design and reported an EBITDA margin of 15.5%. The quality and engineering division provides consulting and engineering services, which are focused on renewable energy and oil and gas sectors. This division reported a growth of 29.4% in gross revenue and an EBITDA margin of 8.1%.

Gross Revenue by Division (Source: Company Reports)

Segment Overview: During FY20, Asia pacific region maintained its revenue and EBITDA margins and won various projects including Pacific Motorway, Bruce Highway, Level Crossing Removals Project, etc. It has a total project value of $52 million. In the same time span, the Americas division maintained its growth trajectory and won Interstate 635 LBJ East Project, University of Texas- project management, Alamo Plaza Restoration. This segment retains a total project value of $126 million.

Key Risks: The company is exposed to a variety of key risks, including the risks related to economic and competitive uncertainties and contingencies associated with the business of Intega. It is also susceptible to competition, industry downturns, inability to enforce contractual and other arrangements, legislative and regulatory changes, sovereign and political risks, ability to meet funding requirements, dependence on key personnel and other market and economic factors. The main risks arising from ITG’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk.

Future Expectations and Outlook: The company is focusing on improving its operational and process efficiency and flexibility to changing environments. It is working on building best practice cyber security framework and to manage its working capital. The company plans that the business development projects and marketing will replace projects in key geographies. ITG has commenced FY21 with a stable balance sheet and increased backlog. It is expecting that the trading for ITG to be ahead of FY20.

In the Americas region, it witnessed continued organic growth, driven by the need for infrastructure investment throughout the United States. It is working on growth in EBITDA margin and improve its operational performance of T2 utility engineers. It is also working on the expansion of niche service lines through acquisition in the Asia Pacific region and is maintaining business agility to face changing market conditions. As certainty returns post the impacts of COVID-19, ITG is likely to resume its long term growth initiatives, which will drive the business forward. The company is aiming to process improvement and refinement after the successful demerger and transition from Cardno. It is aiming to expand organically and through acquisitions.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: ITG’s businesses have responded with flexibility and agility in the current uncertain economic environment of COVID-19 from both an operational and financial perspective. It seems to be well-positioned for heading into 2021. As per ASX, the stock of ITG gave a return of ITG is inclined towards its 52-weeks’ low level of $0.160, proffering a decent opportunity for the investors to enter the market. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target price of lower double-digit upside (in percentage terms). Considering the current trading levels, decent financial performance, resilient in the times of uncertainty, and positive long-term outlook, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.290, on 4 September 2020.

ITG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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