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

Strong Performance in FY19: Primero Group Limited (ASX: PGX) happens to be an engineering contracting company which specialises in providing engineering design and construction services to minerals, energy and infrastructure sectors. As on January 17, 2019, the market capitalisation of Primero Group Limited stood at ~A$63.72 million. The company was listed on the ASX in July 2018 and received $20 million of gross new equity funds through IPO. In FY19, the company generated total revenue of $151.7 million, representing an exuberant growth of 78% on prior year. It was mainly driven by a strong project pipeline with new contract wins during the period.

EBITDA for the year amounted to $10.5 million, up 25% on prior year EBITDA of $8.4 million. Besides, EBITDA excluding one-off costs amounted to $11.7 million, which was in-line with the given guidance range of $10.5 million to $12.0 million and reflected an increase of 30% on FY18. Resultantly, underlying EBITDA margin came in at 7.7%, exhibiting strong operational contract performance coupled with ongoing investment towards people, systems and processes to further support the platform for confident and sustainable growth. As at 30 June 2019, the company has a strong balance sheet position with cash and cash equivalents of $21.86 Mn and borrowing of ~$3 Mn.

Over a period of FY16-FY19, the company has reported a top-line compound annual growth rate of 66.38% with revenue in 2016 and 2019, amounting to $32.94 million and $151.7 million, respectively. Bottom-line CAGR was reported at 86.4% with 2016 and 2019 net income of $0.955 million and $6.189 million, respectively. Top-line and bottom-line over the period went up continuously with the highest growth of 78.1% in 2019 and 353.1% in 2018, respectively.

We presume that the company is well-placed for future growth on the back of strong order book, recent contract wins in NPI and Minerals, robust balance sheet, affirmative outlook for battery mineral sector, etc. 


Key Financial Numbers (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in Primero Group Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The company’s net margin stood at 4.1% in FY19, which is higher than the industry median of 2.7% and, therefore, it can be said that PGX is possessing better capabilities to convert its top-line into the bottom-line. Moreover, PGX’s operating margin stood at 5.9% in FY19, which is higher than the industry median of 4.8%. The company’s current ratio stood at 1.86x in FY19, which is higher than the industry median figure of 1.14x and, therefore, it can be said that PGX is well-placed to meet its short-term obligations. Moreover, decent liquidity levels might support the company in making deployments towards strategic growth objectives which could support its long-term growth prospects. 

The company’s Debt/Equity ratio stood at 0.09x in FY19, which is lower than the industry median of 0.46x and, therefore, it can be said that PGX has deleveraged balance sheet as compared to the broader industry. Generally, a lower debt on the balance sheet reflects that the company’s balance sheet is stabilised, and it can focus on growth initiatives.

  
Key Metrics (Source: Thomson Reuters)

Placement to Raise A$7.6 million: PGX received binding commitments of $7.6 million placement (before costs) at an issue price of $0.34 per share, which involved proposed issuance of 22,415,715 fully paid ordinary shares. This issue price reflects a: 1) discount of 8.1% to last closing price of A$0.37 per share on December 4, 2019, being the last trading day prior to the company entering a trading halt in relation to placement, and 2) discount of 5.5% to the 5 trading day volume weighted average price amounting to A$0.36 per share, up to and including last trading day prior to the halt.

The proceeds of the placement are expected to be utilised towards bolstering the company’s general working capital position, maintaining the robust net cash position and to finance new awards and robust pipeline of Primero’s tenders. It was mentioned that new awards consist of A$115 million non-process-infrastructure for Rio Iron Ore at Koodaideri as well as EPCM for processing upgrades for Northern Star at Pogo in Alaska. It is also important to note that the recent contract wins have increased the company’s total committed order book. A robust balance sheet of the company is very important as it seeks to move up the value chain and capitalise on strong project pipeline, which is in front of PGX, underpinned by the significant minerals, NPI and energy growth opportunities.

Overview of New Contract Awards: With respect to energy, PGX has been awarded an engineering, procurement and construction (EPC) contract by Kalium Lakes for design, procurement and construction of Beyondie SOP Project gas inlet and delivery stations. As per the release, an award of the contract happens to be an extension of design contracts which were awarded earlier, converting those initial works to the full EPC scope. The infrastructure would be comprising of off-site manufactured pressure reduction and metering skids that would be completely designed, manufactured, tested and commissioned at PGX’s assembly facility.

With respect to non-process infrastructure, PGX has been awarded an EPC contract by Rio Tinto for design, procurement, construction and commissioning of heavy vehicle refueling and diesel pipeline infrastructure at West Angelas Iron Ore C&D Project. The company’s understanding of existing West Angelas facilities along with a robust track record of hydrocarbons infrastructure delivery for Rio Tinto Iron Ore has been demonstrated.

Improvement in Performance From Past Few Years: The company’s cash receipts have witnessed a CAGR of 44.33% between the time span of FY15- FY19 and, therefore, it can be said that PGX has improved its capabilities to build cash levels in the past few years. Its cash from operating activities witnessed a CAGR of 9.92% between the same time span and, therefore, it looks like the company is possessing decent operational capabilities. It can be said that the operational capabilities and capabilities to build cash levels might help the company moving forward. Notably, the company’s cash and short-term investments have witnessed a CAGR of 89.67% in the time frame of FY 2015- FY19.

What To Expect From PGX Moving Forward: As per the recent release by the company, it was mentioned that because of the recent contract awards, its committed order book happens to be at record levels. The contracted orders for FY 2020 are around A$165 million, and for FY 2021, the figure stands at around A$100 million. The following picture provides a broader overview:

 
Forward Contract Order Book Relative to Reported FY19 Revenue (Source: Company Reports)

The company stated that tendering activity in Western Australian iron ore market has been generating significant NPI opportunities considering the magnitude of the capital programs being undertaken by Pilbara majors. The company’s robust cash position, low gearing as well as funding liquidity places it well to capitalise on the available future growth opportunities.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/E Based Valuation

P/E Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: PGX’s shares generated a positive YTD return of 5.71% and is trading below the lower band of its 52-week trading range of $0.335 to $0.480 with a reasonable PE multiple of 8.81x, indicating a decent opportunity for accumulation. Fundamentally, the company has a strong balance sheet with significant growth funding flexibility, which places it in an excellent position on available future growth opportunities. Moreover, the company continues to invest in the capacity to deliver larger and targeted higher margins projects. By looking at the strong order book for FY20 and FY21, new contract wins, decent business outlook provided, improving financials, we have valued the stock using a relative valuation method, i.e., P/E multiple, and arrived at a target price of lower double-digit growth (in % term). Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.38 (up 2.703% on 17 January 2020).


PGX Daily Technical Chart (Source: Thomson Reuters)

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