Company Overview: Intega Group Limited (ASX: ITG) operates as a quality, testing and measurement company. It has expertise in construction materials testing, subsurface utility engineering and quality assurance. The company operates in the region of Australia, the United States, Canada and New Zealand. It provides the following services: Construction Materials Testing (CMT) – Provides conformance tests on construction materials such as soil, pavement materials, concrete, rock etc.; Subsurface Utility Engineering Services (UES) – Includes mapping the location and condition of subsurface utilities such as pipes and cables; Owners Representative Services; Environment Testing; Geotechnical Engineering and Quality Insurance (QA).
ITG Details
Decent Margin Performance Driving Earnings: Intega Group Limited (ASX: ITG) is engaged in operating, testing and measurement. The market capitalisation of the company as on 12 March 2021, stood at ~$126.31 million. Despite the impact of the COVID-19 pandemic on the economic environment, ITG reported decent performance in FY20. The company’s operations were considered as part of the essential service category during the pandemic. It plans on process improvement and further refinement following its demerger from Cardno, and also aims to expand organically through acquisition.
ITG reported resilient performance during 1HFY21 with gross revenue of $210.7 million and fee revenue of $157 million. There was an improvement of 11.3% in the underlying EBITDA to $24.7 million when compared to the previous corresponding period. Net operating profit after tax grew by a significant 55.6% to $5.6 million during the same period under consideration. The backlog has increased to $344.7 million in H1FY21, a 4.6% rise on pcp owing to continued infrastructure spend in the US. Net cash flow from operations grew by 28.5% to $17.9 million. The company has achieved this growth on the back of improved fundamental performance, without the receipt of any Government COVID-19 related subsidies or initiatives.
H1FY21 Financial Performance (Source: Company Reports)
Decent Performance from Americas Division: The Americas business reported a gross revenue of $141.6 million during H1FY21. Underlying EBITDA grew by 28.7% to $14.8 million on the prior corresponding period. The construction materials testing business continues to benefit from the infrastructure spend and has witnessed an increase of US$10 million in backlog from the prior period. This was on the back of the company securing the Oak Hills Parkway development during the period. The improvement in the T2 Utility Engineering business has contributed an EBITDA of $3 million on the prior year. There was a decline in the fee revenue in the Asia Pacific region during the period. However, EBITDA performance was in line with the prior corresponding period.
H1FY21 Americas Performance (Source: Company Reports)
Improved Working Capital Management: The company reported decent working capital management during H1FY21, which resulted in positive net cash from operations. The working capital movement was impacted by the timing of payments during the period in regards to insurance and IT. The Group repaid borrowings of $17.3 million and lease liabilities of $7.81 million during the period.
Top 10 Shareholders: The top 10 shareholders together form around 81.86% of the total shareholding, while the top 4 constitute the maximum holding. Crescent Capital Partners Ltd. and Invesco Canada Ltd. are holding a maximum stake in the company at 48.94% and 9.82%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: The company delivered resilient margin performance during the year, despite the impact of the pandemic on its business and the economic environment. It reported an improved gross margin of 85.6% in H1FY21 from 84.1% in H1FY20. EBITDA margin improved to 9.6% in H1FY21. ROE of the company stood at 1.7% during the period, while the cash cycle was at negative 169.8 days. There has been a decreasing trend in the debt to equity ratio of the company, with the repayment in borrowings. The debt to equity ratio stood at 0.80x in H1FY21, down from 0.98x in H1FY20.
Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The Group is exposed to risks arising out from its financial instruments like interest rate risk, foreign exchange risk, credit risk and liquidity risk. The management has a credit policy in place in order to minimise its exposure to credit-related risks. It places its cash and investments only in liquid securities and those which have a decent rating. Due to the dynamic nature of the business, the company has to maintain sufficient cash and liquidity in the balance sheet, in addition to securing committed credit lines to meet the capital requirements. ITG has its operations spread out geographically, and as such, it is exposed to currency fluctuations. The onset of COVID-19 has had a material impact on the company, with the deferral and cancellation of several key projects, impacting the profitability of the company.
Outlook: The company is well-positioned to benefit from the improving market conditions going forward and expects additional investment in Government and mining infrastructure. It plans to expand on niche service lines through acquisition in the Asia Pacific region. In the Americas region, it will focus on margin expansion, particularly in the T2 Utility Engineering business. It will also look for the geographic expansion of the Raba Kistner business, both organically and through acquisition. ITG expects FY21 underlying EBITDA to be in the range of $45 million to $49 million, which will be an improvement from $42.9 million in FY20. It also intends to pursue a capital management strategy that will include a share buyback program.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The company has declared an interim dividend of 1 cent per share during H1FY21. It anticipates final dividend payment to be between 50-70% of NPAT. As per ASX, the stock of ITG is trading above its average 52-weeks’ levels of $0.160-$.400. The stock of ITG gave a positive return of ~5.26% in the past three months and a positive return of ~1.69% in the past one month. On a technical analysis front, the stock of ITG has a support level of ~$0.285 and a resistance level of ~$0.336. We have valued the stock using an P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company might trade at a slight premium to its peer average P/E (NTM trading multiple), considering the decent bottom-line performance and optimistic guidance. For the purpose, we have taken peers such as Southern Cross Electrical Engineering Limited (ASX: SXE), CIMIC Group Limited (ASX: CIM), NRW Holdings Limited (ASX: NWH), to name a few. Considering the current trading levels, improved financial performance and working capital management, reduction in net debt and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.300, up by 5.263% as on March 12, 2021.
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ITG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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