Company Overview: Perenti Global Limited (ASX: PRN) is a global, diversified mining services group with over 30 years’ experience in surface and underground mining. The company has operations and offices in 13 countries across four continents and is involved in some of the world’s largest mining projects. PRN provides exploration drilling, production drilling, blasting and geotechnical services throughout Australia. It also provides end-to-end contract surface mining in Africa, from mine planning and exploration to mine development, production and reclamation.

PRN Details

Growth Backed by Decent Pipeline of Surface and Underground work:  Perenti Global Limited (ASX: PRN) is a diversified global mining services group with businesses in surface mining, underground mining and mining support services. As on 24 February 2021, market capitalisation of the company stood at $880.36 million. During FY20, the company reported robust operational and financial performance, despite the challenging conditions caused by the COVID-19 pandemic, reflecting the resilience and strength of the company’s business. Over the period, the company also made significant progress in transforming its surface mining business in Africa. Currently, the company is focused on progressing its 2025 Group strategy, which has five pillars – operational excellence, strategic growth, organisational health, technology-driven future, and financial capacity. From 2016 to 2020, the company’s revenue has grown at a CAGR of 28.71%.

Revenue Trend, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Looking ahead, the company is focused on leveraging its long-term relationships with clients and strengthening the balance sheet to pursue more tier-one opportunities as the business grows. Moreover, the company seems well-positioned to capture opportunities identified in the Group’s tender pipeline. The company is targeting a strong pipeline of surface and underground work and is focused on converting opportunities into secured contracts across a range of different projects in Australia.

H1FY21 Result Highlights: For H1FY21, the company reported group revenue of $1.01 billion and EBITDA of $201 million. The company’s underlying performance during the period was impacted by external factors such as COVID-19, strengthening AUD and a challenged east coast equipment rental market. During H1FY21, the company’s underground business delivered record earnings of $110.0 million, up from $98 million in pcp, driven by improved performance at existing projects. Over the period, the company completed AMS strategic review and made positive progress on implementing findings. The company’s surface performance delivered revenue of $215 million and earnings of $4 million for H1FY21. The Group’s operating cash flow stood at $184.0 million with a decent cash conversion of 92%. Since 01 July 2020, the company has secured around $1.1 billion of new work and contract extensions. As at 31 December 2020, the company had work in hand of $5.5 billion with a target tender pipeline of $9.2 billion. At the end of H1FY21, the company had net debt of $540.2 million, down by 14% on pcp. PRN has declared an interim dividend of 3.5 cents per share for H1FY21. The dividend has a record date of 17 March 2021, and it will be paid on 7 April 2021.

H1FY21 Results Highlights (Source: Company Reports)

An Analysis of FY20 Earnings: For the year ended 30 June 2020, the company reported revenue of $2.04 billion, up 4% YoY on the back of new projects, partially offset by contract cessations. Further, the company reported an EBITDA of $444 million, up 7% on FY19, due to exceptional operational performance in challenging conditions. Operating cash conversion ratio grew by 89% to 96% in FY20.

FY20 Results Snapshot (Source: Company Reports)

Key Margins: The company’s profitably margins have improved over the last five years, reflecting the resilience and strength of the company’s business. Gross margin for FY20 stood at 31.1%, up from 29.5% in FY19. EBITDA margin for FY20 stood at 21.2% in FY20, up from 19.3%. Current ratio for FY20 stood at 2.48x in FY20, up from 2.38x in FY19.

Past 5-year Growth Profile, Profitability Metrics and Liquidity Profile for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 42.12% of the total shareholding while the top four constitutes the maximum holding. L1 Capital Pty Ltd. and Fidelity Management & Research Company LLC. are holding a maximum stake in the company at 8.10% and 7.93%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

$200 Million Agnew Underground Mining Contract Extension: On 1 February 2021, the company announced that its subsidiary, Barminco, has secured a A$200 million mining contract extension at Gold Fields’ Agnew Gold Mine in Leinster, Western Australia, in line with the company’s 2025 Group Strategy. Barminco has been successfully operating at Agnew since 2010 and this new extension will take the current term out to December 2023.

$307 million in new work and contract extensions: On 21 January 2021, the company announced that it has secured $307 million in new work and contract extensions at Australian mining projects. The new work and contract extensions are across four underground and two surface mining projects in New South Wales and Western Australia.

Key Risks: The company is exposed to a range of market, financial, operational, and socio-political risks that could have an adverse impact on the Group’s future financial prospects. PRN is exposed to the risks and uncertainty caused by the COVID-19 pandemic. The company is also exposed to the changes in regulation in overseas jurisdictions.

Outlook: PRN currently has work in hand of $5.5 billion and a $9.2 billion pipeline of opportunities in stable jurisdictions, across commodities, such as copper and gold, that have a positive outlook. Looking ahead, the company is focused on cash conversion, refinancing debt and further strengthening the balance sheet and liquidity position. It is also focused on further enhancing performance in Surface and ensuring that all new opportunities exceed the return on capital hurdle rates. PRN expects the resource sector to witness growth in the coming times. With significant investments made in its business structure and systems, the company seems well-placed to capitalise on the expected resources sector growth. Exploration expenditure of PRN is expected to increase in 2021. The company expects 2HFY21 revenue and margins to be consistent with the results achieved in H1FY21.

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: Over the last three months, the stock of PRN has corrected by 13.86%. The stock has a 52-weeks low and high price of $0.450 and $1.60, respectively. On the technical analysis front, the stock has a support level at ~$1.004 and resistance level at at ~$1.54. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company might trade at a slight discount to its peer median P/E (NTM Trading multiple), considering the continued impact from COVID-19 scenario, low ROE, while also taking into account that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like NRW Holdings Ltd (ASX: NWH), MACA Ltd (ASX: MLD), Monadelphous Group Ltd (ASX: MND), etc. Considering the company’s decent work in hand, pipeline of opportunities, reduced net debt, modest outlook and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.180, down by 5.601% as on 24 February 2021.

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

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