Company Overview: Primero Group Limited (ASX: PGX) has expertise in providing engineering design, construction and operational services to the Minerals, Energy, and Infrastructure sectors. Primero Group contracts range from straight design, straight construction and design and construction in all three sectors. The company provides project implementation and offers services to a diverse set of clients, ranging from mid-sized companies to international mining and energy houses. Its 1HFY20 service revenue comprised of 63% revenue from Energy, followed by 19% from Non-Process Infrastructure (NPI) and 18% from Minerals.


PGX Details
 
  

Significant Increase in Revenue and Strong Balance Sheet: Primero Group Limited (ASX: PGX) is an engineering contracting company which specializes in providing engineering design and construction services to the Minerals, Energy, and Infrastructure sectors. As on 08 May 2020, the market capitalization of the company stood at ~$40.47 million. During FY19, the company delivered an excellent financial performance with an increase of 78% in revenue to $152 million. The composition of FY19 service revenue by key business segment comprised of approximately 50% from Energy, 27% from Non-Process Infrastructure (NPI) and 23% from Minerals. It also reported healthy and sustainable growth and witnessed a record of delivery and excellence with a compound growth of over 80% p.a. in underlying EBITDA in the past three years. During the year, the company reported an increase of 30% in EBITDA to $11.7 million. This brings the EBITDA margin of the company to 7.7% and reflects strong operational contract performance coupled with continued investment in systems, processes, and people. It also shows that the company is well managing its costs and hence is increasing its profitability. 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. This is mainly because of the broad customer base and increased clients from 39 in FY18 to 53 in FY19. PGX has also won various contract awards across sectors and is active and competitive for new upcoming contract opportunities over the coming months. During FY19, the company retained a strong balance sheet with a low gearing and net debt of $3 million with significant growth funding flexibility and cash position of $21.9 million. 

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

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


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. Henry (Cameron David) Ltd is the largest shareholder in the company, with a percentage holding of 13.86%. 


Top 10 Shareholders (Source: Refinitiv, 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 3.0%. In the same time span, net margin of the company was 1.6% as compared to the industry median of 2.7%. During 1H20, Return on Equity of the company stood at 4.5% and is slightly higher than the industry median of 4.2%. This indicates that the company is well managing the wealth of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company was 1.87x, higher than the industry median of 1.18x. This indicates that the company is liquid enough to pay off its current liabilities using its existing assets. During the half-year, assets/equity ratio of the company was 2.14x, lower than the industry median of 4.77x and debt/equity ratio stood at 0.13x as compared to the industry median of 0.54x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. 


Key Margins (Source: Refinitiv, Thomson Reuters)

Strong Balance Sheet and Significant Increase in Revenue: The company has recently released its interim results for the period ended 31 December 2019 wherein it reported a significant increase of 65% in total revenue to $112.5 million, wherein approximately $70 million of the revenue was attributable to the Wartsila contract. 1HFY20 service revenue comprised of 63% revenue from Energy, followed by 19% from Non-Process Infrastructure (NPI) and 18% from Minerals. The conservative approach pursuant to the Wartsila contract revenue recognition resulted in EBITDA excluding one-off items of $4.1 million and a gross margin of 7.1%. During the half-year, PGX reported a net operating cash outflow of $28.1 million, reflecting the significant working capital build associated with the Wartsila contract. During 1H20, PGX reported a strong balance sheet with low gearing and non-current debt totaling $6.1 million. In the same time span, the cash balance of the company stood at $10 million. PGXis aiming to deliver on the record level of contracted work in its current order book and is focused on growing its existing business. During 1H20, the company made additions to its existing Rio Tinto contract and is awarded with variations extending contracts at both Koodaideri and Mesa K for a combined value of ~$20 million. 


Changes in Composition of Revenue (Source: Company Reports)

Recent Update: As Neometals Limited announced about the commencement of the jointly-funded AACE Class 3 Feasibility Study with Manikaran Power Limited, under its lithium refining collaboration with the latter, Primero Group has been appointed to manage the engineering study and key vendor package integration, supported by Sichuan Calciner Technologies

Future Expectations and Growth Opportunities: Amid the current market conditions and the global fallout of the virus, PGX is optimistic about its long-term outlook and remains competitive with a large volume of additional contracts over the coming months. The company has recent contract wins in NPI and Minerals which totals approximately $215 million and has reported a record committed order book of ~$195 million for FY20 and $170 million for FY21. The company is targeting the conclusion of Wartsila process in FY20 and is aiming to finance substantial contract work pipeline by unwinding elevated working capital position and through additional debt facilities.

PGX retains its liquidity levels and expects growth in current contracted orders. It also expects a higher proportion of divisional revenue from minerals and is focusing on technical excellence. The company is building potential for larger revenue and longer duration contracts and is broadening its potential to access multi-year O&M and BOO project opportunities. 


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings based Market Multiple Valuation Approach (Illustrative)

Price to Earnings based Market Multiple Valuation Approach (Source: Refinitiv, 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 gave a return of 27.03% in the past one month. Despite the high level of uncertainty surrounding the virus spread, PGX is well placed to capitalize on the strong pipeline of available growth opportunities. Currently, the stock is trading slightly below the average of 52-week high and low levels of $0.100 and $0.460, respectively with reasonable PE multiple of 6.35x. Considering the returns in the past one month, decent balance sheet and liquidity position, an excellent position to capitalize on available growth opportunities, and decent long-term outlook, we have valued the stock using Price to Earnings based market multiple valuation approach and have arrived at an indicative target price with an upside of lower double-digit (in percentage terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.260, up by 10.638% on 08 May 2020.
 
 
PGX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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