Company Overview: Primero Group Limited (ASX: PGX) provides engineering design, construction and operational services to the minerals, energy and infrastructure sectors. The company has expertise in project implementation and provides services to diverse set of clients, ranging from mid-sized companies to international mining and energy houses. The 1H FY20 service revenue comprised of 63% revenue from Energy, followed by 19% from Non-Process Infrastructure (NPI) and 18% from Minerals. Primero Group contracts range from straight design, straight construction and design and construction in all three sectors. The company was founded in 2011, and it was successfully listed on ASX in July 2018.


PGX Details

Robust Balance Sheet with Significant Flexibility: Primero Group Limited (ASX: PGX) is an engineering contracting company which is specialized in providing engineering design and construction services to the minerals, energy and infrastructure sectors. As on 17 April 2020, the market capitalization of the company stood at ~$29.28 million. During FY19, the company delivered healthy and sustainable growth and reported record of delivery and excellence through outstanding financial performance with an increase of 78% in revenue to $152 million. The composition of FY19 service revenue by key business segment was approximately 50% from Energy, 27% from Non-Process Infrastructure (NPI) and 23% from Minerals. In the same time span, EBITDA of $11.7 million was in line with guidance and reflected an increase of 30% on FY18. This brings the EBITDA margin to 7.7% and reflects decent operational contract performance coupled with continued investment in people, systems and processes. In the past three years, compound growth of over 80% p.a. in underlying EBITDA was observed. During FY19, the company also retained a robust balance sheet with significant growth funding flexibility and cash position of $29.1 million and a low gearing with net debt of $3 million. In the same time span, the company broadened its base and increased its number of clients to 53 from 39 in FY18. It also won several significant contract awards across various sectors and remains active and competitive for upcoming new contract opportunities over the coming months. Over the span of 4 years from FY15 to FY19, the company has witnessed a CAGR of 43.6% in revenue and a CAGR of 34.06% in gross profit. 

PGX has also released its interim results for the period ending 31 December 2019 which represented another definite period of revenue growth and contract delivery from its businesses. The company is targeting to finance the considerable contract works via progressive unwinding of its current elevated working capital position and through additional debt facilities. 

The market remains active and competitive, and hence the company expects large volumes of contract opportunities in the coming months. The recent contract wins of RIO and FMG have strongly validated the company’s strategy of positioning as a contractor of choice for the Pilbara-based iron ore majors. The tendering activities in the iron ore market in Western Australia is likely to generate considerable NPI opportunities.


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Primero Group Limited.


Top 10 Shareholders (Source: Thomson Reuters)

Financially Stable Balance Sheet and Decent Liquidity Levels: During 1H20, gross margin of the company stood at 7.1%, and EBITDA margin of the company was 3%. In the same time span, net margin of the company was 1.6% as compared to the industry median of 3.1%. and Return on Equity of the company was in line with the industry median and stood at 4.5%. During 1H20, Assets/Equity ratio of the company was 2.14x, lower than the industry median of 4.90x and Debt/Equity ratio stood at 0.13x as compared to the industry median of 0.59x. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. In the same time span, current ratio of the company was 1.87x, higher than the industry median of 1.12x. This indicates that the company is liquid enough to pay off its current liabilities using its current assets.


Key Margins (Source: Thomson Reuters)

Significant Increase in Revenue and Low Gearing: The company has recently released its results for the half-year ended 31 December 2019 wherein it reported another period of revenue growth and contract delivery. During 1H20, the company witnessed a significant increase of 65% in total revenue to $112.5 million. Approximately $70 million of this revenue was attributable to the Wartsila contract. The conservative approach with respect to Wartsila contract revenue recognition resulted in a gross margin of 7.1% and EBITDA excluding one-off items of $4.1 million. During the half-year, the company reported net operating cash flow of $(28.1) million. This reflected the significant working capital build associated with the Wartsila contract. During 1H20, PGX reported a low gearing with a cash balance of $10 million and non-current debt totaling $6.1 million. It is focused on growing its existing business and delivering on the record level of contracted work in its current order book.

The 1H FY20 service revenue comprised of 63% revenue from Energy, followed by 19% from Non-Process Infrastructure (NPI) and 18% from Minerals. The energy division achieved revenue of approximately $71 million in 1H20, up from $32 million in 1H19 and generated revenues of approximately $20 million from the minerals segment. In the same time span, revenue from NPI totaled to approximately $21 million, driven predominately by the execution of significant design and construction work on several projects for Pilbara-based iron ore majors. 


Change in Revenue Composition (Source: Company Reports)

Additions to Rio Tinto Contract: The company has recently made additions to its existing Rio Tinto contract. It has been awarded with variations extending contracts at both Koodaideri and Mesa K for a combined value of ~$20 million. The variations reflect additional civil works at the Mesa J PP2 Wet Processing Facility and additional ‘options selections’ to the Koodaideri contract. The company expects Mesa J works to be completed in 2020.

Future Expectations and Growth Opportunities: The company had recent contract wins in NPI and Minerals which totalled to approximately $215 million and has reported a record committed order book of ~$195 million for FY20 and $170 million for FY21. PGX is targeting to finance substantial contract work pipeline by unwinding elevated working capital position and through additional debt facilities. The company also expects growth in current contracted orders and expects a higher proportion of divisional revenue from minerals. 

Based on the current market conditions, Primero group is positive on its long-term outlook and remains competitive with a large volume of additional contracts up over the coming months. The company will also broaden its potential to access multi-year O&M and BOO project opportunities. The company retains its liquidity levels and is targeting the conclusion of Wartsila process. PGX is focusing on technical excellence and is building potential for larger revenue and longer duration contracts.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA multiple based relative valuation approach (Illustrative)

EV/EBITDA multiple based relative valuation approach (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 PGX is trading close to its 52-weeks’ low level of $0.1, proffering a decent opportunity to enter the market. Despite the high level of uncertainty surrounding the virus spread, the company is maintaining a strong position and is sufficiently liquid to meet all its requirements. It continues to maintain its contracted order book guidance and is focused on off-site design engineering and procurement work. Considering the solid cash position, low gearing and funding liquidity and an excellent position of the company to capitalize on available future growth opportunities, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at an indicative target price offering an upside of lower double-digit (in percentage terms). Thus, we see a potential in the stock and recommend a ‘Speculative Buy’ rating at the current market price of $0.180 (up 5.882% on 17 April 2020). 
 
 
PGX Daily Technical Chart (Source: Thomson Reuters)

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