Company Overview: Primero Group Limited (ASX: PGX) is a multi-disciplinary engineering group mainly involved in providing engineering design and construction services to the minerals, energy and infrastructure sectors. The company’s construction team has several years of experience in all aspects of civil, mechanical and structural construction activities. Primero Group Limited provides its services to a diverse client base which includes mid-sized companies as well as international energy and mining corporations. The company was listed on ASX in 2018 and it intends to grow its existing business and deliver on the record level of contracted work in its current order book.
PGX Details
Increase in Revenue and Decent Balance Sheet: 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 21 August 2020, the market capitalization of the company stood at ~$48.07 million. During FY19, the company delivered an improvement in financial performance with an increase of 78% in revenue to $151.7 million. 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 decent operational contract performance coupled with continued investment in systems, processes, and people. 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 decent balance sheet with a low gearing and non-current debt of $3 million with significant growth funding flexibility and cash position of $21.9 million.
During the half-year ending 31 December 2019, the company reported another definite period of revenue growth and contract delivery from its businesses. It is targeting to finance the contract works via additional debt facilities and through the progressive unwinding of its current elevated working capital position. The 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 periods. 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 13.90%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
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 2.6%. During 1H20, Return on Equity of the company stood at 4.5% and is slightly higher than the industry median of 4.1%. 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 1.13x. 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 0.49x. 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.
Key Margins (Source: Refinitiv, Thomson Reuters)
Half Year Results: During 1H20, the company reported an increase of 65% in total revenue to $112.5 million, wherein ~$70 million of the revenue was attributable to the Wartsila contract. Service revenue for 1H20 is comprised of 63% revenue from Energy, followed by 19% from Non-Process Infrastructure 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 decent 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. PGX is 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)
Piedmont Appoints Primero Group as Preferred EPC and Operations Contractor: The company has entered a memorandum of understanding (MOU) with Piedmont Lithium Limited to work on an exclusive basis to agree binding documentation relating to the definitive feasibility study, front-end engineering design, EPC delivery, commissioning, ramp-up and contract operations of the spodumene concentrator. This will provide incentives for the company to achieve safety, schedule, budget, process performance, production, and recovery targets.
Track Record of Delivery: The company retains a broad base of global clients, projects, and minerals diversity. Over the years, the company has delivered a decent financial performance with a sustained investment in capability. As on 30 June 2020, PGX retained a decent balance sheet with a cash position of $15 million and a low gearing with $6 million of debt.
Key Risks: The company is exposed to a variety of risks including the timing for commencement of projects or award of tenders, claims, disputes, and proceedings, risks related to both order book and preferred contractor status, cancellation, or delays, risks related to the uncertain economic environment, lower trading volumes, etc.
Outlook: With the recent NPI contract addition, the total committed orders for FY21 stands at ~$230 million. The company expects to FY21 underlying EBITDA margin in the range of 6% to 8%. It retains active and competitive business conditions in all key sectors and has a qualified tender pipeline of ~$1,440 million. The company has a sustained culture with consistency in superior returns to its shareholders. It has an exposure to contract operational models with life duration of 5-7 years and has an attractive project ownership exposure with clear value realization pathways. PGX is focused on continued diversification across key sectors and is aiming for further expansion in existing and new geographies.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple based Relative Valuation (Illustrative)
Price to Earnings Multiple based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The company continues to invest in its capacity to deliver larger and higher margin projects and seems to be well-capitalized on the decent pipeline of available growth opportunities. Based on current business conditions and tendering opportunities across its key divisions, PGX retains a positive long-term outlook. As per ASX, the stock of PGX gave a return of 12% in the past three months and a return of 1.82% in the last one month. On the technical analysis front, the stock of the company has an immediate support level of ~$0.249 and a resistance level at ~$0.314. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price of lower double-digit upside (in percentage terms). Considering the decent returns in the past three months, improvement in financial performance, positive long-term outlook, and growth pipeline, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.280 on 21 August 2020.
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PGX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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