Company Overview: Perenti Global Limited (ASX: PRN) is a diversified global mining services group that offers both surface and underground mining solutions. PRN has built a portfolio of companies that provide a complete mining value chain throughout Australia, Africa and around the world. Under its surface mining business, PRN provides exploration drilling, production drilling, blasting, and geotechnical services. PRN has specialisation in rapid high-speed mine development, production, diamond drilling, vertical development, design planning and scheduling, and equipment supply and maintenance.

PRN Details

Outlook Supported by Decent Pipeline of Opportunities: Perenti Global Limited (ASX: PRN) is a global mining services group with interests in surface mining, underground mining, and mining support services. As on 7 April 2021, the company’s market capitalisation stood at ~$757.11 million. Despite the challenging conditions caused by the COVID-19 pandemic in FY20, PRN managed to report robust operational and financial performance during the year while expanding into the key geographical mining markets of Canada and Botswana. 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 and gross profit have grown at a CAGR of 28.71% and 32.6%, respectively.

Past 5-year Financial Performance (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Looking ahead, the company is focused on winning work by extending current contracts and securing new projects. Further, it is continuing to establish a presence in North America to support its expansion into the new and highly prospective jurisdiction. With a healthy balance sheet, work in hand of $5.5 billion and a $9.2 billion pipeline of opportunities in stable jurisdictions, PRN seems well placed to capitalise on the expected growth in resources sector as it continues to deliver against its 2025 strategy.

Improved Financial Flexibility in H1FY21: During the half-year ending 31 December 2020, the company reported underlying EBIT (before amortisation) of $93.8 million, down by 15% on the previous corresponding period (pcp), impacted by the softer earnings from the Surface mining business in Africa and $6 million impact related to the strengthening Australian dollar (relative to the US dollar). The company’s underground business delivered record earnings of $110.0 million in H1FY21, representing 90% of PRN Group EBIT(A) at an average margin of 15.1%. The surface mining business generated $4.0 million EBIT(A) in H1FY21, supported by the company’s Australian operations and the Sanbrado Project in Burkina Faso. Over the period, the company successfully issued high yield bonds at an improved interest rate, improving the overall financial flexibility. At the end of H1FY21, the company had net debt of $540.2 million, down by 14% on pcp. As at 31 December 2020, the company had work in hand of $5.5 billion with a target tender pipeline of $9.2 billion. PRN has declared an interim dividend of 3.5 cents per share for H1FY21, payable on 7 April 2021.

H1FY21 Results (Source: Company Reports)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported revenue of $2.04 billion, up 4% on the previous year, on the back of new projects, partially offset by contract cessations. Despite the challenges caused by the COVID-19 pandemic during the year. PRN delivered a strong underlying net profit after tax of $110 million. Further, the company reported EBITDA of $444 million, up 7% on FY19, due to exceptional operational performance in challenging conditions.

FY20 Results Highlights (Source: Company Reports)

Key Margins: Despite facing challenging conditions, the company was able to deliver improved profitability margins in FY20, compared to the previous year, 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.

Profitability Metrics and Liquidity Profile, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 42.91% 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 7.55%, respectively, as also highlighted in the chart below:

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

Received LOI for Savannah Nickel Project: Recently, one of the company’s subsidiaries, Barminco, received a Letter of Intent from Panoramic Resources Limited for the development and production works at the Savannah Nickel Project, which is an advanced nickel sulphide development project in Australia. PRN expects this contract to expand its current work in hand by over $280 million over a four-year contract term. Earlier in February 2021, Berminco 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.

Appointment of New Joint Company Secretary: PRN recently announced the appointment of Mr. Rajiv Ratneser as Joint Company Secretary. Mr. Ratneser has over 20 years’ of national and international experience across legal, commercial, governance, risk and internal audit mainly in the resources, engineering and construction industries.

$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 effect 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: Looking ahead, 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. The company is optimistic about the outlook of the resources sector and expects exploration expenditure to increase during 2021. With significant investments made in its business structure and systems, the company seems well placed to capitalise on the expected resources sector growth. PRN continues to search for investment opportunities in new technologies to drive safety, productivity and sustainability. The revenue and margins of second half of FY21 are expected to be consistent with the results achieved in H1 FY21.

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 22.49%. The stock is trading slightly lower than the average 52-week price level band of $0.575 and $1.600. On the technical analysis front, the stock has a support level of $0.972 and resistance of $1.492. 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 the company can trade at a 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), Macmahon Holdings Ltd (ASX: MAH), and MACA Ltd (ASX: MLD), etc. Considering the decent performance from the company’s underground business in H1FY21, improved operating cash conversion ratio, reduced net debt, improved financial flexibility, decent work in hand, modest outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $1.09, up by 1.395% as on 7 April 2021.

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

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