SRG Global Limited

Company Overview: SRG Global Limited is an engineering-led specialist construction, maintenance, and mining services company across the entire asset lifecycle. Some of the key sectors in which SRG Global operate in, have high levels of activity and investment in the medium-term are Infrastructure Construction, Infrastructure Maintenance, Water, Oil and Gas, Energy, Mining and Transport sectors. The construction segment consists of supplying integrated products and services to customers involved in the construction of complex infrastructure, whereas the asset segment supplies integrated services across the entire lifecycle. The mining segment provides ground solutions including production drilling, ground and slope stabilization, design engineering and monitoring services.



SRG Details

Decent Increase in Revenue and Record Work in Hand: SRG Global Limited (ASX: SRG) is an engineering-led specialist construction, maintenance and mining services group operating across the entire asset lifecycle. As on 15 May 2020, the market capitalization of the company stood at $98.08 million. The company is very disciplined and focused on its long-term strategy to create a balanced business portfolio with a mix of both recurring and project-based revenue streams and has an exceptionally diverse capability and skillset. During FY19, the company reported a record work in hand of $708 million and witnessed an increase in revenue to $506.4 million from $431.6 million. This was mainly due to TBS acquisition in New Zealand and the acquisition of the remaining 49% of Gallery Facades. SRG also saw a step-change in the diversity of its revenue base in a way that the current work in hand is comprised of approximately 70% of recurring and term revenues. 2019 has been a year of significant transformation for the business involving the creation of SRG Global by unifying and refreshing of SRG Limited (SRG) and Global Construction Services Limited (GCS). During the year, challenging market conditions, delays in the construction of large-scale projects and carrying costs of maintaining capability impacted adjusted EBITDA and EBIT of the company, which stood at $32 million and $22.5 million, respectively. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 34.08% in revenue and a CAGR of 20.48% in gross profit, reflecting the company’s financial strength and sustained focus on growth. SRG also reported a robust balance sheet with cash in hand of $58.3 million and net assets of $252 million. The decent financial and operational performance of the company enabled the Board to declare a final dividend of 0.5 cents per share, bring the total dividend to 1.5 cents per share for the year.

The company has also released its interim results for the period ended 31 December 2019 wherein it reported solid operational performance in Mining Services, Specialist Facade and Civil Construction. SRG also reported a robust balance sheet with liquidity and steady growth in Asset Services and has a strong pipeline of opportunities across growth sectors. 

The company is ensuring the sustainable success of SRG Global well into 2020 and beyond, and is building clear momentum with several contract wins and record work in hand. SRG Global is aiming to develop the level of recurring revenue to balance the current weighting towards project-based revenue. 


FY19 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of SRG Global Limited. Perennial Value Management Ltd. is the largest shareholder in the company, with a percentage holding of 14.43%. 


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Well Management of Costs and Increasing Returns to Shareholders: During 1H20, gross margin of the company stood at 53.1%, higher than the industry median of 13.6%. In the same time span, net margin of the company was 1.4%, up from 1% in 2H19. The higher gross and net margin indicate that the company is managing its costs well and is able to convert its revenue into profits. During 1H20, EBITDA margin of the company witnessed an increase over the previous half and stood at 4.5%, up from 2.7% in 2H19, indicating increased profitability. In the same time span, current ratio of the company stood at 1.33x, higher than the industry median of 1.18x. This implies that the company is liquid enough and can pay off its current liabilities using its current assets. During 1H20, Return on Equity witnessed a slight increase over the previous half and went up to 1.4% from 1% in 2H19. This indicates that the company is well deploying the capital of its shareholders and is capable of generating profits internally. In the same time span, Debt/Equity ratio of the company stood at 0.26x lower than the industry median of 0.54x and Assets/Equity ratio of the company was 1.68x as compared to the industry median of 4.77x. The lower Assets/Equity ratio and Debt/Equity ratio 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)

Strong Operational Performance and Resilient Balance Sheet: During 1H20, the company reported an increase of $28.6 million in adjusted revenue to $267.1 million and an adjusted EBITDA of $12.1 million. In the same time span, SRG also reported an opportunity pipeline of $5.7 billion across growth sectors with imminent contract awards and robust growth in Asset Services with an increase of 172% in work in hand in the past 12 months. During the half-year, the company retained a strong balance sheet with the liquidity of $67.2 million and low gearing at 6%. The company has also declared a fully franked interim dividend of half a cent per share. The company has also announced that it has been awarded a new five-year drill and blast contract with Saracen Mineral Holdings Limited of around $70 million wherein it will offer specialist drill and blast services including production drilling, explosives supply and management as well as grade control drilling to Saracen. This contract will further diversify SRG’s customer base and will add to its long-term work in hand. During 1H20, the company reported strong operational performance and margin improvement in Mining Services Segment while the construction segment was impacted by continued carrying costs vs timing of project awards in the WA Structures division.


Growth in Work in Hand (Source: Company Reports)

Future Expectations and Growth Opportunities: SRG Global is well positioned for sustainable growth and has a strong opportunity pipeline in the coming years. The significant and growing recurring revenue base with record work in hand is likely to result in long term solutions to complex problems across the entire asset lifecycle. The strength of the business and the relentless approach of the company will ultimately deliver significant long-term value for its shareholders. The company expects increased work in hand with upcoming awards of Western Australian building construction contracts, and near-term contract wins in the Mining Services Segment. The company has a positive long-term outlook for the diverse sectors and geographies and is targeting growth in specialist civil infrastructure construction. It will continue to invest in innovative technology and will focus on selective acquisitions to complement capability and its presence across the globe. 


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)[

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation Approach (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of SRG is trading close to its 52-weeks’ low level of $0.170, proffering a decent opportunity for the investors to enter the market. Despite the uncertainty in the global markets because of the outbreak of COVID-19, the company reported resilience in its financial position and is likely to navigate these uncertain times. It has significant available liquidity and headroom in its bank covenants and maintains strong relationships with its lenders. The softer market conditions have posed challenges to the financial markets; however, the company has been building a strong foundation which will help it deliver solid returns to shareholders. Considering the attractive trading levels, resilient financial position, improvement in margins and decent long term outlook, we have valued the stock using the price to cash flow multiple based relative valuation approach and have arrived at an indicative target price with an upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.215, down by 2.273% on 15 May 2020. 

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

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