Company Overview: Intega Group Limited (ASX: ITG) is a construction & engineering company, which mainly provides construction materials testing (CMT), subsurface utility engineering services (UES) and quality assurance for energy companies (QA). The company operates its business mainly in Australia, the United States, Canada, and New Zealand. The services provided by the company mainly include conformance tests on construction materials like soil (earthworks), aggregates, pavement materials, concrete, grout, mortar, and rock.
ITG Details
Strong Cash Position to Support Business Growth: Intega Group Limited (ASX: ITG) primarily provides construction materials testing (CMT), subsurface utility engineering services (UES) and quality assurance for energy companies (QA). The market capitalisation of the company stood at ~$115.79 million as on 6th November 2020. During the onset of COVID-19, the company’s operations were labelled as an essential service, which resulted in manageable financials. The ongoing focus of the company revolves around the development of business and marketing to replace projects in key geographies. Also, APAC operations of the company have not experienced any material impact from the global pandemic.
The company’s strategies and medium-term growth plans are consistent with the environment. Besides, the company is enhancing its operating structure to optimize performance. The company plans to invest in organic growth as well as small strategic acquisitions.
The company closed FY20 with a decent balance sheet, which was supported by an increased cash balance to ~$40 million as compared to ~$13 million as on 30th June 2019. This was underpinned by continued focus on working capital management and strong invoicing and collections processes. As on 30th June 2020, the company recorded net debt (excluding the impact of AASB16) of $46.0 million, reflecting a decline of $19.8 million against FY19. During FY20, the company reported net cash flow of $37.1 million from its operations as compared to $16.73 million in FY19. In addition, the company's cash conversion ratio increased from 68.2% in FY19 to 110.8% in FY20.
Cash Flow Statement (Source: Company Reports)
Decent Financials Supported by Rise in Demand for Infrastructure: ITG primarily generates its revenue from 4 divisions, which are construction sciences, RABA KISTNER, Quality & Engineering and T2 Utility Engineers. The construction sciences division recorded growth of 0.4% in gross revenue in FY20 and reported an EBITDA margin of 10.2%, which is in line with the previous year. As a result of growth in infrastructure division, RABA KISTNER reported gross revenue growth of 17.5% against FY19. The Quality & Engineering division experienced a growth of 29.4% in gross revenue with an EBITDA margin of 8.1%. T2 Utility Engineers, which provides surface engineering utility, reported gross revenue growth of 4.6%.
For the year ended 30th June 2020, the company reported gross revenue amounting to $452 million, reflecting a rise of 8.2% over pcp. During FY17-FY20, the company reported a CAGR of 8.4% in total revenue. This reflects that the company possesses decent capabilities for generating revenues which might help ITG in achieving long-term growth. Underlying EBITDA (Excluding Impact of AASB 16) for the period witnessed a rise of 3.7% against pcp to $30.9 million. The growth has been mainly generated by strong infrastructure during FY20 as well as strong oil and gas markets in 1H FY20.
2020 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)
Growth in Profit Margins Showcased Effective Cost Management: During FY20, the company reported gross margin of 85.6%, which is higher than the industry median of 14.7%. However, the company experienced a fall in its net margin as compared to the prior year. During the same period, ITG experienced a growth of 0.9% in EBITDA margin to 7.4%, reflecting the effective management of its costs. On the liquidity front, the company reported a current ratio of 1.68x as compared to the industry median of 1.09x. This indicates that the company is in a decent position to address its short-term obligations against the broader industry. Also, the company reported a negative cash cycle of 260.7 days. On the leverage side, assets/equity ratio of the company stood at 2.51x, which is lower than the industry median of 4.73x. During FY20, debt/equity ratio stood at 0.95x, which is lower than the prior year debt/equity ratio of 1.37x.
Key Margins (Source: Refinitiv, Thomson Reuters)
FY20 Segment Performance: During FY20, the Asia Pacific segment of the company showcased decent performance with a growth of $0.4 million in gross revenue to $142.6 million. The segment reported EBITDA (excluding the impact of AASB 16) of $14.4 million and $17.8 million, including the impact of AASB 16. Key contracts by the segment include Pacific Motorway, Bruce Highway, M4-M5 Link Mainline Tunnels, Level Crossing Removals Project (VIC), etc. The Asia Pacific segment ended FY20 with a total project value of $52 million.
The Americas Segment recorded gross revenue of $309.4 million, reflecting a rise of 12.4% YoY, and reported an EBITDA of $17.4 million. Few projects won during the year include Interstate 635 LBJ East Project, University of Texas, SH 358 Reconstruction, and Alamo Plaza Restoration, etc. Notably, the LBJ I-635 East project is one of the major highway projects given by the Texas Department of Transportation (TxDOT).
Asia Pacific EBITDA and % Margin (Source: Company Reports)
Commencement of Buy Back: On 29th October 2020, the company notified the market that its Board has approved an on-market share buyback, which is likely to commence on 13th November 2020. The company will buy back up to 10% of Intega's ordinary shares on issue during the 12-month period over which the buyback will be conducted. The company believes that the buyback will add value for all shareholder and also assist in managing the lack of liquidity.
Key Risks: The company’s business is sensitive to numerous risks such as rising competition from peers, downturn in the industry in which it operates. In addition, the company’s growth could be disrupted by economic and competitive uncertainties and contingencies pertaining to the business. Also, the company’s inability to fulfill contractual and other arrangements may act as a headwind for the business. Moreover, changes in regulations, sovereign and political risks, as well as the ability to meet funding requirements and other market and economic factors may act as growth obstacles. In addition, the company is also susceptible to the risks arising from its financial instruments such as interest rate risk, foreign exchange risk, credit risk and liquidity risk.
What to Expect: Going forward, the company's priority revolves around the safety of its employee and community. In addition, the company is focused on growing its operational and process efficiency. The company entered FY21 with a decent balance sheet and an increased back log of 25.5% as compared to the previous year. With respect to the Americas segment, the company will focus on expanding its EBITDA margin and improving the operational performance of T2 Utility Engineers. The Americas Segment plans to maintain business agility to cope up with the changing market conditions. For the Asia Pacific segment, ITG's focus will be on the expansion of niche service lines via acquisition.
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: To combat the impact of the COVID-19 pandemic, the company continued its strong relationship with major clients and key vendors. Besides, ITG strengthened its cash position as it retained a prudent approach to working capital management. In the past three and six months, the stock has corrected 19.67% and 14.03%, respectively. The stock is currently trading towards its 52-week low level of $0.160, proffering a decent opportunity for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price of low double-digit upside (in percentage terms). On a technical analysis front, the stock of ITG has a support level of ~$0.23 and a resistance level of ~$0.28. Considering the strong balance sheet, growth in segment performance, current trading levels, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.245 per share, down by 5.77% on 6th November 2020.
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ITG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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