Company Overview: Duratec Limited (ASX: DUR) is engaged in the assessment, protection, remediation, and refurbishment services to asset structures, and in particular, steel and concrete infrastructure. It has a presence in the Western Region of Australia with a revenue mix of ~52%, and the Eastern Region with a share of ~48% of FY21 revenues. The Group has a well-diversified business model with a presence in Defence (contribution of 42% of FY21 revenues), Mining & Industrial (22% of FY21 revenues), Buildings & Facades (17% of FY21 revenue mix), and Other (19%).

DUR Details

Decent Orderbook & Comfortable Cash Position Expected to Drive Growth: The company's performance has been impacted during the year with the onset of the COVID-19 pandemic, with delays in contracts & project activities. However, the key industry theme and demand drivers continue to be in place and are expected to drive the growth of the company moving ahead.

Securement of $53 Million Contract:

• The company has recently updated that Duratec - Ertech JV, (DEJV) has been awarded a $53 million Design and Construction wharf project. The project works have commenced at the site and is expected to be completed in September 2023.
• It has been disclosed that the project is with a Commonwealth Government agency.

FY21 Results Overview:

DUR has reported resilient performance during the period, though impacted by COVID-19 headwinds. It has built on its balance sheet and maintained a decent cash position.

• The Group reported revenues of $235.7 million in FY21, compared to revenues of $247.3 million in FY20. The decrease in top-line is primarily due to delays in contract awards, mainly in the Defence and Buildings & Facades sectors. However, it has been partially offset by decent performance in Mining & Industrial sectors.
• Normalised NPAT decreased by ~29.4% to $8.6 million in FY21, compared to $12.2 million in FY20, owing to lower sales during the period, though partially offset by increased contribution from DDR.
• The company has maintained a decent balance sheet with a cash balance of $41.2 million as of 30 June 2021 and has a net cash position of $27.8 million.

Revenue Trend (Source: Analysis by Kalkine Group)

Increase in Contribution from DDR Australia Pty Ltd:

DUR has 49% stake in DDR, which is considered under equity method of investment. The balance 51% stake is owned by Dundee Rock. DDR has a diversified workforce with 43% Aboriginal staff and 38% women.

• It reported solid performance in FY21 and posted revenues of $50.7 million, compared to $33.4 million in FY20.
• NPAT increased by ~30% in FY21, leading to the delivery of $1.5 million dividends to Duratec.
• It has current work in hand of $31 million & $302.8 million of identified opportunities, and the outlook remains positive.

Top 10 Shareholders: The top 10 shareholders together form around 65.20% of the total shareholding, while the top 4 constitute the maximum holding. Ertech Holdings Pty. Ltd. and Diprose (Deane) Ltd. are holding a maximum stake in the company at 19.90% and 11.16%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported consistent gross margin performance in FY21, when compared to FY20. It also reported an uptick in current ratio to 1.19x in FY21, from a level of 1.16x in FY20. Cash cycle days improved marginally to 5.2 days in FY21, from 6.2 days in FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Impact of COVID-19: The Group’s operations have been impacted by the onslaught of the COVID-19 pandemic with project delays. It also faced challenges in its operations due to shortages of labour and the risk may persist going forward.
• Quality Risk: Its future performance and earnings depend on its credibility to deliver quality work to its clients. Any let down on this aspect can hurt the financial performance of the company.
• Termination Risk: There is also the risk of termination of contracts from clients, which might impose unplanned costs to the company.

Outlook: DUR has a decent order book of $236.2 million as of 16 August 2021, reflecting a significant uptick from $145 million as of 31 July 2020. It has also maintained a decent tendered pipeline of $657.2 million of work and identified opportunities worth $2.2 billion. The business outlook seems favourable for the company with key macro themes in place. Rise in commodity prices and high volumes is expected to drive demand in the resource sector, and Government stimulus spending is expected to uplift demand of the company in the Defence space.

Stock Recommendation:  The Group will hold its AGM on 19 November 2021. As per ASX, the stock of DUR is trading below its average 52-weeks’ levels of $0.350-$0.950. The stock of DUR gave a negative return of ~18.47% in the past six months and a negative return of 1.31% in the past one month. On a TTM basis, the stock of DUR is trading at an EV/Sales multiple of 0.3x, lower than the industry median (Industrials) of 2.1x, and thus seems undervalued. Considering the valuation on TTM basis, decent balance sheet with net cash position, optimistic outlook, strong order book supported by an increased tendered pipeline and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.375, down by 3.847% as on 22 October 2021.

Technical Insights:

DUR's prices are trading around an important support level of AUD 0.36, indicating the possibility of an upside direction. On the daily chart, the leading indicator RSI (14-period) is trading in negative territory at ~43 levels; however, forming a moderate positive divergence with the prices action, supporting an uptrend hereon.

DUR Daily Technical Chart, Data Source: REFINITIV

Note: The purple color line in the chart shows RSI (14-period)

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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