Company Overview: SRG Global Limited, formerly Global Construction Services Limited, is primarily involved in engineering, mining, maintenance and construction contracting. The Company operates through three segments: Construction, Asset Services and Mining. Its Construction segment consists of supplying products and services to customers involved in the construction of infrastructure, including bridges, dams, office towers, shopping centers, hotels, car parks, recreational buildings and hospitals. Its Asset Services segment consists of supplying services to customers across the asset life cycle. It provides services across multiple sectors, including oil and gas, energy, infrastructure, offshore, mining, power generation, water treatment plants, commissioning, decommissioning, shutdowns and civil works. The Mining segment services mining clients and provides ground solutions, including production drilling, ground and slope stabilization, design engineering and monitoring services.

SRG Details 

Record Work in Hand of $708 Million: SRG Global Limited (ASX: SRG) is an engineering led specialist construction, maintenance and mining services group, which is operating across the entire asset lifecycle. As on 24 January 2020, the market capitalisation of the company stood at ~$158.26 million. In the recently held Annual General Meeting, the top management of the company stated that FY19 was a year of transformation for the company, which involved the creation of SRG Global, by combining SRG Limited (‘SRG’) and Global Construction Services Limited (‘GCS’). During FY19, revenue of the company went up to $506.4 million, from $431.6 million in FY18. This was mainly driven by TBS acquisition in New Zealand and the acquisition of the remaining 49% stake in Gallery Facades. In the same time span, adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) of the company stood at $32 million with an adjusted EBIT of $22.5 million. This was impacted by the challenging market conditions, delayed awards of targeted large-scale construction projects and the associated carrying costs to maintain engineering and delivery capability. The company has made some significant progress in establishing itself as the most sought-after business, despite facing some significant headwinds in the last year. It has also reported a strong balance sheet with cash in hand of $58.3 million and net cash of $12.2 million. The decent financial performance of the company enabled the Board to pay a final, fully franked dividend of 0.5 cents per share, taking the full year dividend to 1.5 cents per share. The company has built momentum and has reported record work in hand of $708 million, up by 36% since December 2018 and has strategically shifted the business towards the recurring revenue streams. The company has won significant contracts and has further $5.2 billion in a pipeline of opportunities in positive growth sectors. Over the span of 4 years from FY15 to FY19, the company has witnessed a CAGR of 34.08% in revenue and a CAGR of 20.48% in gross profit. 

SRG Global Limited is well-positioned for growth, underpinned by its record work in hand and substantial growth in the recurring revenue base. The company is advancing towards the growth stage and is encouraged by the level of activity and potential investment in sectors. The dedication and strength of the business have enabled them to solve complex business problems in the entire asset lifecycle. One of the primary goals of the business is to continue to strategically build the level of recurring revenue to balance the current weighting towards project-based revenue. 


Work in Hand (Source: Company Reports)

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 with a percentage holding of 14.43%.


Top 10 Shareholders (Source: Thomson Reuters)

Efficient Management of Costs and High Gross Margin: During FY19, gross margin of the company stood at 49.5%, higher than the industry median of 12.9%. This indicates that the company is managing its costs well and is able to convert its revenue into profits. In the same time span, current ratio of the company was 1.35x as compared to the industry median of 1.14x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets. The company also reported a stable balance sheet with a Debt/Equity multiple of 0.18x, lower than the industry median of 0.46x. During the year, EBITDA margin of the company was 3.5%, and net margin of the company stood at 1.9%.


Key Metrics (Source: Thomson Reuters)

One Team as SRG Global: During FY19, the company was involved in the creation of SRG Global. The integration of two companies- SRG Limited (‘SRG’) and Global Construction Services Limited (‘GCS’) has been completed and is now functioning as one business and one team as SRG Global. The company has embraced and laid itself as a strong foundation for the upcoming years. SRG Global Limited now has a diverse capability and skill set and has the expertise to self-perform and provide complete end-to-end solutions to the clients. The major sectors in which SRG Global operates, include investment in the medium-term involving infrastructure construction and maintenance, energy, mining, water, oil and gas, and transport sectors.

Operating Segments: The company has three major operating segments- construction, asset services and mining services. SRG is focusing on specialist markets of dams, bridges, tanks and windfarms and has secured vertically integrated scale projects with repeat Tier 1 Building clients. The company has multiple integrated offerings secured in Building in the health, education, commercial and hospitality sectors. With respect to Asset services, the company has sustained key infrastructure assets across a broad range of industries and has leveraged site presence for “One Stop Shop” model. SRG Global Limited has derived operational efficiency and high asset utilisation pursuant to mining services and has key commodity exposure in gold and iron ore. On the financial front, the construction segment has contributed 57% of the revenue in the company, followed by 27% by asset services and 16% by mining services.


Revenue by Segment (Source: Company Reports)

Preferred Tenderer for $90.0 Million Alcoa Asset Services Contract: The company has recently announced that it has been awarded the preferred tenderer status for $90.0 million for a multi-disciplinary asset services contract with Alcoa for up to five years. The range of services consists of specialist rope access, heavy mechanical and electrical maintenance, and scaffold services at Alcoa’s alumina refinery in Kwinana. This is expected to start in early 2020. In another release, the company stated that it will announce its half-year results for the six months ended 31 December 2019 on 25 February 2020.

SRG Global Awarded $12 Million Dam Anchoring & Strengthening Works: The company has recently announced that it has obtained a contract of ~$12 million as part of the Fairbairn Dam Improvement Project. As per the scope of the project, SRG will supply and install specialist post-tensioned anchors, demonstrating its expertise and capability in dam anchoring and strengthening projects. The company expects to complete this project by late 2020. SRG Global has also secured a $44 million contract for the design, supply and installation of an engineered curtain wall facade for the $3.2 billion Parramatta Square Project. This contract has been provided by Built Obayashi Joint Venture and is one of the largest contracts for the company’s Facades division. Works are expected to begin in mid-2020 and will go on for approximately 18 months.

What to Expect from SRG: The company is well-positioned to meet each challenge with a professional and relentless approach, delivering long term value for its shareholders. It has built momentum with several significant contracts wins, positioning the company for success in both the medium and longer term. With core focus on securing recurring and term revenues, the company has entered an optimistic phase of growth. The company anticipates being the most sought- after specialist construction, maintenance and mining services group, and is targeting growth globally in specialist civil and infrastructure construction. It is also prioritising growth from selective acquisitions to complement its capability and footprint. SRG Global Limited is expected to remain disciplined in its work winning, operational execution and delivery against long-term strategic objectives and has placed its focus on revenue diversity to balance the earnings profile. Significant balance sheet strength and strong cash position underpin the foundation of future growth which is backed by tangible assets of $115.2 million.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: 
Method 1: EV/EBITDA based Multiple Approach

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Method 2: Price to Earnings based Multiple Approach

Price to Earnings Based Valuation (Source: 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 $0.285, proffering a decent opportunity for accumulation. The company will focus on delivering shareholder value into the future through dividend yield and earnings growth and has strategically positioned the business towards recurring revenue streams. It offers diverse market sector exposure with a global footprint. The company is capitalising on the combined and integrated offering to the market and has reported a robust balance sheet. Considering the trading levels, decent financial performance and positive outlook, we have valued the stock using two relative valuation methods - EV/EBITDA multiple and Price to Earnings multiple. As a result, we have arrived at a target price of high single-digit to low double-digit growth (in percentage terms). Hence, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.365, up by 2.817% on 24 January 2020. 

 
SRG Daily Technical Chart (Source: Thomson Reuters)

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