Primero Group Limited

Company Overview: Primero Group Limited (ASX: PGX) has expertise in engineering design, construction and operational services to the Minerals, Energy, and Infrastructure sectors. Primero Group contracts range from straight design, straight construction and design and construction in all three sectors. The company provides project implementation and offers services to a diverse set of clients, ranging from mid-sized companies to international mining and energy houses. The composition of FY20 service revenue by key business segment was ~39% Energy, ~31% Non-Process Infrastructure (NPI) and ~30% Minerals.  

PGX Details

Increase in Revenue and Healthy Balance Sheet: Primero Group Limited (ASX: PGX) is an engineering contracting company, which is specialized in providing engineering design and construction services to the minerals, energy, and infrastructure sectors. As on 11^th September 2020, the market capitalization of the company stood at ~$42.92 million. FY20 has been a year of growth in terms of topline growth within the Group, setting for further development into FY21. The company’s diversity, capability, and capacity are building its reputation in the industry. During FY20, total revenue of the company went up by 36% y-o-y to $205.6 million. This was mainly due to a broad base of global clients, projects, and minerals diversity. In the same time span, gross operating margin stood at 8.8% (FY19: 13.0%), and EBITDA (excluding one-off costs) was $9.5 million (FY19: $11.7 million), impacted by the conservative approach for revenue recognition with respect to Wartsila contract.

During FY20, the significant build-up in working capital associated with outstanding monies under the Wartsila contract resulted in a cash outflow of $11.9 million as compared to the cash inflow of $3.1 million in FY19. During the year, the company reported a healthy balance sheet with low gearing and a cash balance of $15.2 million. PGX is focused on growing its existing business and delivering on the strong level of contracted work in its current order book. The company has a current qualified tender pipeline of approximately $1.4 billion and its Early Contractor Involvement model is gaining traction, with recent ECI wins delivering strong follow-on potential for large-scale EPC roles.

The market remains dynamic and competitive, and hence, the company is likely to benefit from significant volumes of contract opportunities in the coming months. The company is expected to generate considerable NPI opportunities from the tendering activities in the iron ore market in Western Australia. Over the years, the company has given a decent financial delivery with a three-year compound growth in annual underlying EBITDA of over 75% p.a.  

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Primero Group Limited. Henry (Cameron David) Ltd is the largest shareholder in the company, with a percentage holding of 13.90%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Stable Balance Sheet and Decent Liquidity Levels: During FY20, Return on Equity of the company was 11.4%, higher than the industry median of 10%. This indicates that the company is generating above average returns for its shareholders. During FY20, current ratio of the company stood at 1.59x, higher than the industry median of 1.09x. This shows that the company has sound liquidity position to pay off its current liabilities. Assets/Equity ratio of the company stood at 2.54x, lower than the industry median of 4.73x and Debt/Equity ratio of the company was 0.12x as compared to the industry median of 0.44x. Lower assets/equity and debt/equity ratio indicate that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. 

Looking at the profitability metrics, during FY20, the gross margin of the company stood at 8.8% as compared to the industry median of 14.7%. However, the net margin of the company was 2.3% relative to the industry median of 2.7%. During the year, the company reported an EBITDA margin of 4.2%.

 Key Margins (Source: Refinitiv, Thomson Reuters)

Segment Performance: The composition of FY20 service revenue by key business segment was ~39% Energy, ~31% Non-Process Infrastructure (NPI) and ~30% Minerals. The Energy division of the company has a successful track record of servicing clients that operate onshore and offshore power generation and oil and gas facilities. During the year, the energy division generated a revenue of $79 million as compared to $76 million in FY19. The Non-Process Infrastructure division services mining and energy clients which process facilities or are developing mineral and energy projects. During FY20, this division reported a revenue of $64 million versus $41 million in the previous corresponding period (pcp). The mineral division design, constructs, and operates mineral processing facilities and generated a revenue of ~$63 million.

FY20 Financial Highlights (Source: Company Reports)

Update on Wartsila Contract: The company has recently provided an update on its contract with Wartsila Australia wherein it reported progressive extension of the scope, the contract period, and the value of works performed. With regards to the payment in an adjudication determination, Wartsila transferred the payment into the courts of South Australia. In addition, it sought judicial review of the adjudication decision to make a determination in cases where the trigger for payment has been satisfied. The Court found PGX was unable to establish that SW Completion has been achieved, implying  the adjudicator did not have jurisdiction to make his determination.

Key Risks: The company is exposed to a variety of risks including the timing for commencement of projects or award of tenders, claims, disputes, and proceedings, risks related to both order book and preferred contractor status, cancellation, or delays, risks related to the uncertain economic environment, lower trading volumes, etc.

Decent Growth Outlook: The company retains a large order book, which is strongly backed by Tier 1 clients including Rio Tinto, Fortescue Metals Group and Northern Star. It retains a total committed order of ~$230 million for FY21 and is likely to witness a large volume of further EPC opportunities to be awarded during 1H FY21. PGX has a wide variety of key commodity and industry leverage. In addition, it has dynamic and competitive business conditions in all key sectors.

PGX has a qualified tender pipeline of ~$1,440 million and preferred contractor status granted for $756 million. The company retains a multiple commodity exposure, including precious, ferrous, industrial and battery metals. The key strategy for PGX is to develop a successful model for early-stage involvement and project integration. The company is focused on delivering superior returns to shareholders. PGX has provided guidance for FY21 and expects to report an underlying EBITDA margin in the range of 6% to 8%. It is focused on sustaining strong growth levels across its key sectors, with further expansion in existing and new geographies.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: PGX has a track record of delivery and excellence and has shown resilience despite the gloomy market conditions. It seems to be well-positioned with a healthy balance sheet. The company continues to invest in its capacity to deliver larger and higher-margin projects and seems to be well-capitalized on the decent pipeline of available growth opportunities. As per ASX, the stock of PGX gave a return of 8.7% in the past six months. On a Technical Front, the stock price of PGX has a support level of ~$0.214 and a resistance level of ~$0.34. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target upside of lower double-digit (in percentage terms). Considering the valuation, decent order pipeline, healthy balance sheet, high-margin projects,etc., we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.250 as on 11 September 2020.

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

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