Company Overview: Primero Group Limited is an Australia-based multi-disciplinary engineering company. The Company provides a range of engineering services including design, fabrication, procurement, installation, testing and commissioning. Its services also include consultancy, fit for purpose design, construction, operation, maintenance and asset management of project plants. The Company provides its end-to-end engineering services to minerals, energy and infrastructure industries.
PGX Details
Significant Growth Since Listing: Primero Group Limited (ASX: PGX) happens to be an ASX listed company which is engaged in the business of providing engineering, design, construction as well as operational services to minerals, energy and infrastructure sectors. As on July 12, 2019, the market capitalisation of Primero Group Limited stood at ~A$58.35 million. The company had earlier released its results for the six months period to December 2018 in which its Energy division witnessed strong growth with revenue amounting to $31.9 million, as compared to $1.8 million in 1H FY 2018. This significant increase was mainly because of progressive execution of Primero’s contract with Finnish company Wartsila for 211MW Barker Inlet Power Station in South Australia, which is being developed for the AGL Energy. On July 9, 2018, the company got listed on Australian Securities Exchange (or ASX). The IPO of the company garnered $20 million of new equity funds, providing with additional working capital in order to finance future projects. Since listing, the company witnessed robust growth and the revenue for 1H FY 2019 increased by 66% as compared to the previous corresponding period.
The company’s increasing level of service revenue diversification can be seen from the total service revenue which amounted to $68.1 million for 1H FY 2019. This is being made of relative business segment contributions of 47% from Energy, 29% from NPI as well as 24% from Minerals. The company’s capital expenditure amounted to $2.4 million which was higher than 1H FY18 figure of $0.8 million because of the major purchase of 2 cranes for the construction of the Barker Inlet Power Station.
Moving forward, the company might be supported by lower gearing and a robust cash position. Additionally, the company’s significant operational and revenue generation capabilities might act as the tailwinds for long-term growth.
Consolidated Profit & Loss Statement (Source: Company Reports)
Top 10 Shareholders: The following table provides a broad overview of the top 10 shareholders in Primero Group Limited:
Top 10 Shareholders (Source: Thomson Reuters)
Decent Position In Key Margins: Primero Group Limited is having decent standing when it comes to its key margins as its net margin stood at 3.7% in 1H FY 2019, which is higher than the industry median of 2.4%, reflecting that PGX is having better capability to convert its top line into the bottom line. Additionally, the company’s EBITDA margin stood at 6.5% in 1H FY 2019 that is higher than the industry margin of 5.4%.
Key Metrics (Source: Thomson Reuters)
The current ratio stood at 1.85x in 1H FY 2019, which is higher than the industry margin of 1.14x that implies that the company is in a better position to address its short-term obligations when compared to the broader industry. It also looks like that the company stands in a decent position to make deployments towards the operational activities which might help in the long-term objectives.
Talking about the leverage ratios, the company’s Debt/Equity ratio stood at 0.12x in 1H FY 2019 which is lower than the industry median of 0.22x, implying that the company’s balance sheet is less leveraged as compared to the broader industry.
Understanding Performance of NPI Business and Minerals Division: Primero Group Limited stated that the revenue from Minerals division in 1H FY 2019 amounted to $16.3 million which was lower than the 1H FY 2018 figure of $36.0 million because of execution of the large-scale EPC contract for Alliance Minerals’ Bald Hill Lithium Project processing facility during the prior period. Coming to the performance of another business, it was mentioned that the revenue from NPI business has witnessed a substantial rise and stood at $19.9 million for 1H FY 2019, as compared to $3.4 million in 1H FY 2018. This strong growth was mainly because of the execution of major design as well as construction work on Rio Tinto projects.
Lower Gearing Might Act As a Positive Factor: Coming to the balance sheet position, the company’s cash at balance date was $26.1 million. The company added that the gearing happens to be very low and its current and noncurrent debt stood at $3.6 million. The low gearing might act as the key growth catalyst and might also attract the attention of the market players. The following picture gives the business segment detail:
Business Segment Detail (Source: Company Reports)
Talking about the cashflow position, the company’s net operating cashflow amounted to $7.5 million in 1H FY 2019 as compared to $7.9 million in the pcp. The company stated that its net investing cashflow amounted to $2.4 million, while in pcp, it was $0.7 million. The 1H FY19 figure consists of the purchase of two cranes for the construction of the Barker Inlet Power Station. The company had also added that no substantial capital purchases have been forecasted for the remainder of FY19. The company’snet financing cashflow amounted to $20.5 million as compared to the pcp figure of ($1.7) million. The 1H FY 2019 figure got driven by $20 million of gross new equity funds which were received via the company’s initial public offering and ASX listing in the month of July 2018.
Key Takeaways From Euroz Conference Presentation: As per the Euroz Conference Presentation, Primero Group Limited stated that they are focused towards consistently delivering the superior returns for shareholders and, additionally, they are of the view that the ongoing strengthening of the team, systems, processes and capabilities might help in delivering confident and sustainable growth. In the presentation, the company had also provided its views for 2020 and the long term pipeline in which it added that there are expectationsfor the active market conditions throughout all the three key businesses, particularly Minerals and Non-Process Infrastructure (NPI). Also, there are expectations for the substantial additional BOO opportunities.
Key Valuation Metrics (Source: Thomson Reuters)
Valuation Methodologies: PE- Based Valuation
PE- Based Valuation (Source: Thomson Reuters), *NTM: Next Twelve Months
Note: All forecasted figures and peers have been taken from Thomson Reuters
What To Expect From PGX Moving Forward: The company recently presented its business prospects at the Euroz Conference and highlighted about FY19 activity and its outlook. As per the presentation, the company focuses on growing EPC capacity, contacts, team as well as delivery reputation in the desired sectors and building the capability in order to deliver BOO/BOOT solutions under the larger, higher margin contracts. Additionally, the company is focusing on building and growing the O&M division to multiple projects with robust recurring revenue streams. In the same presentation, the company added that it is possessing a robust cash position and is having very low gearing. We expect that these aforesaid parameters might help the company in achieving its long-term strategic objectives. Primero Group Limited stated that it is having excellent liquidity and it also threw light on A$20 million bonding facility as well as binding term sheet for A$15 million multi-option facility. PGX had added that the recent contract wins and robust H2 FY19 order book have led to the revenue forecast upgrade to A$140 million.
The following picture provides a broader overview of expected numbers:
Revenue and EBITDA (Source: Company Reports)
The company added that there are expectations that BIPS contract with Wartsila might open more opportunities in the Energy moving forward.
Stock Recommendation: From the analysis standpoint, the stock seems to be decent as its top line had witnessed CAGR growth of 56.81% in the time frame of FY 2014- FY 2018 which reflects that the company is possessing strong capabilities to generate revenues. Also, the company is possessing robust operational capabilities which are evident from its CAGR growth of 70.03% in cash from operating activities in the time span of FY 2014- FY 2018. There are expectations that its strong revenue generation capabilities coupled with its operational capabilities might help in delivering strong growth to the company moving forward. Also, the company had witnessed strong CAGR growth in its cash receipts of 53.10% (FY 2014- FY 2018) which provides confidence that the company could be able to maintain its robust cash position moving forward. All these factors might help the company in gaining traction among the market players. Further, the company stated that no dividend had been declared or paid with respect to 1H FY 2019 results. The funds have been retained as working capital in order to help finance robust pipeline of work. Based on the foregoing, we have valued the stock using Relative Valuation method, P/E multiple and arrived at the target price, which is offering double-digit upside (in %). However, it looks like that the stock has been trending on a slightly volatile path as it delivered a return of -2.50% in the span of previous one year, while, in the time frame of past six months, the stock delivered a return of 1.30%, and 4% for last three months. Hence, considering aforesaid facts and current trading level, we give a “Speculative Buy” rating on the stock at the current market price of A$0.390 per share.
PGX Daily Chart (Source: Thomson Reuters)
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