SRG Global Limited

Company Overview: SRG Global Limited (ASX: SRG) is an engineering-led specialist company that is engaged in the construction, maintenance, and mining services across the entire asset life-cycle. SRG Global operates in various sectors including Infrastructure Construction, Infrastructure Maintenance, Water, Oil and Gas, Energy, Mining and Transport sectors. The construction segment supply integrated products and services to customers involved in the construction of complex infrastructure, whereas the asset segment supply integrated services across the entire life-cycle. 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 life-cycle. As on 07 August 2020, the market capitalization of the company stood at ~$133.74 million. The company has a disciplined business approach and is focused on its long-term strategy to create a balanced portfolio with a mix of both recurring and project-based revenue streams.

During FY19, SRG reported record work in hand of $708 million and witnessed an increase in adjusted 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 ~70% of recurring and term revenues. 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, which stood at $32 million and $22.5 million, respectively. However, SRG reported a healthy balance sheet in FY19 with a cash balance of $58.3 million.

During 1H20, the company reported decent operational performance in Mining Services, Specialist Facade and Civil Construction. SRG retains ample liquidity and steady growth in Asset Services and has a decent pipeline of opportunities across growth sectors. The company is ensuring the sustainable success of SRG into the coming years and is building momentum with several contract wins and record work in hand. It 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.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

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 14.3% and 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 1.13x. 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 improvement 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 0.49x and Assets/Equity Ratio of the company was 1.68x as compared to the industry median of 4.82x. The lower Assets/Equity ratio and Debt/Equity ratio indicates 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. 

Key Margins (Source: Refinitiv, Thomson Reuters)

Decent 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 significant 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 healthy balance sheet with a liquidity of $67.2 million and low gearing at 6%. 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.

New Contract Wins: The company has recently announced that the operations in New Zealand have resumed normal levels due to higher levels of business confidence and market certainty. SRG has secured ~NZ$50 million of new works with its long term client base. It has also secured two contracts valued at ~$30 million with Water Corporation with a duration of approximately 18 months and a long-term five-year ~$25m contract with Yara Pilbara Fertilisers Pty Ltd & Yara Pilbara Nitrates Pty Ltd. Under the contract, SRG will provide access and insulation services, with additional scope opportunities for various fixed plant maintenance solutions

Key Risks: The group’s activities are exposed to a variety of risks including financial risk, market risk, including currency risk, interest rate risk and other price risks, credit risk and liquidity risk. Due to the outbreak of COVID-19 crisis, the Government of New Zealand and Australia imposed a complete shutdown of operations that impacted FY20 EBITDA. Compliance measures and industry pressures due to the pandemic resulted in the disruption of international projects. The company is anticipating credit losses and may incur increasing costs for the provisions.

Outlook: The company has reduced its fixed cost base and is focusing on core business, clients, and geographies. Despite the short-term challenging market conditions, it retains a healthy financial position and seems to be well-positioned for long-term sustainable growth and exposure to growth industry sectors. The company has provided guidance for FY20, wherein it expects underlying EBITDA to be in between $20 million to $21 million. It also anticipates FY21 EBITDA growth to be ~50% from FY20 underlying EBITDA.

During the second half, SRG has reduced its net debt to $8 million and retains ample liquidity with available funds of $73 million. Mining Services of the company are operating in high-quality growth commodities and expect Asset Services to return to normal levels in Q1 FY21. As of 30 June 2020, the company has work in hand of $707 million with a strong pipeline of opportunities of over $6 billion. The company has a positive exposure to Government-backed stimulus programs. The company is likely to announce its full year results for FY20 on 25 August 2020.

Work in Hand and Opportunity Pipeline (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

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

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

Stock Recommendation: Despite the unprecedented global market conditions because of the COVID-19 crisis, the company reported resilience in its financial position. It has significant available liquidity and diverse industries with tier one client base. The company is building a strong foundation that can deliver increasing returns to shareholders. It has secured various new contracts, taking works secured since the start of the new financial year to over $110 million. As per ASX, the stock of SRG gave a return of 17.65% in the past one month and is inclined towards its 52-weeks’ low level of $0.170. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation and have arrived at an indicative target price offering an upside of lower double-digit (in percentage terms). Considering the attractive trading levels, resilient financial position, decent returns in the past one month, improvement in margins and positive guidance, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.295, down by 1.667% on 07 August 2020.

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

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