Company Overview: SRG Global Limited, formerly Global Construction Services Limited, is primarily involved in engineering, mining, maintenance and construction contracting. The Company operates through three segments: Construction, Asset Services and Mining. Its Construction segment consists of supplying products and services to customers involved in the construction of infrastructure, including bridges, dams, office towers, shopping centers, hotels, car parks, recreational buildings and hospitals. Its Asset Services segment consists of supplying services to customers across the asset life cycle. It provides services across multiple sectors, including oil and gas, energy, infrastructure, offshore, mining, power generation, water treatment plants, commissioning, decommissioning, shutdowns and civil works. The Mining segment services mining clients and provides ground solutions, including production drilling, ground and slope stabilization, design engineering and monitoring services.

SRG Details

Decent Fundamentals: SRG Global Limited (ASX: SRG) is primarily engaged in delivering a suite of engineering-led specialist construction, maintenance as well as mining services throughout the entire asset lifecycle. As on October 11, 2019, the market capitalisation of SRG Global Limited stood at ~A$169.4 million. The company reported a decent set of numbers for twelve months ended June 30, 2019 (FY19), wherein its adjusted revenue stood at $506.4 million and adjusted EBITDA came in at $32.0 million. During the same period, the company’s adjusted EBIT amounted to $22.5 million. The company is well-placed for sustainable growth in FY20 and beyond because of record work in hand and a significant and growing recurring revenue base. The figure for work in hand amounted to $708.0 million, a rise of 36% since Dec 2018 and the company’s recurring revenue represents around 70% of work in hand revenue mix. The company’s Managing Director, named David Macgeorge stated that underlying EBITDA amounting to $32.0 million was achieved amidst a challenging business environment and market conditions. The company’s results for FY19 includes 12-month contribution from SRG Limited (i.e., July 1, 2018 to June 30, 2019) and 10- month contribution from Global Construction Services Limited (i.e., September 1, 2018 to June 30, 2019), after merger of 2 companies which was wrapped up in FY19. The company’s adjusted revenue amounted to $506.4 million in FY19, which reflects a rise from FY18 figure of $431.6 million and the rise was because of TBS acquisition in New Zealand in the month of March 2018 and the acquisition of remaining 49% of Gallery Facades in the month of June 2018. The revenue base of the company is becoming more diverse in terms of geography and segment, and SRG has been maintaining focus on revenue diversity in order to balance the earnings profile.

There are expectations that decent capabilities to generate revenues and a robust balance sheet position might act as tailwinds for future growth. Additionally, the company has respectable liquidity levels and is maintaining a conservative net cash balance sheet, which might help in overall growth. We presume that the company has decent fundamentals at the back of unique business model, which offers a fully integrated structure package on significant projects, synergistic acquisition and partnerships, robust balance sheet, regularly dividend payments to its shareholders, and aims to grow globally in specialist Civil Infrastructure Construction.  

Financial Strength (Source: Company Reports)

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


Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The company’s net margin stood at 1.9% in FY19, while its EBITDA margin was 3.5%. During the same period, gross margin stood at 49.5% as compared to the industry median of 12.9%. Talking about the liquidity levels, the company’s current ratio stood at 1.35x in FY19, which is higher than the industry median of 1.14x and, thus, it can be said that SRG would be able to meet its short-term obligations. Additionally, decent liquidity levels reflect that the company would be able to make deployments towards key strategic business activities which might support the long-term growth. The company’s Debt/Equity ratio stood at 0.18x in FY19, which is lower than the industry median of 0.46x. At the end of FY19, the company had cash and cash equivalents of $58.3 million. The company has a robust cash position from which it is able to target future projects as well as growth opportunities, moving forward.


Key Metrics (Source: Thomson Reuters)

Key Personnel Changes: SRG Global Ltd has recently advised that Mr Enzo Gullotti resigned from the designation of Executive Director. It was also added that Mr Gullotti wishes to focus on other business interests.

SRG Global awarded ~ $12 million Contract: SRG Global Ltd announced that it has secured ~$12 million contract as part of Fairbairn Dam Improvement Project. It was also stated that Fairbairn Dam located near Emerald in Queensland is undergoing approximately $169.5 million remediation and strengthening project, which is being managed by Sunwater Limited. The Civil Division of SRG Global Ltd has been engaged by Sunwater Limited in order to supply and install 78 specialist post-tensioned anchors throughout spillway crest. Works are anticipated to be completed by late 2020. The scope of works is an extension of SRG Global’s working relationship with Sunwater on this project.

Secured Contract for Parramatta Square Project: SRG Global Ltd has made an announcement about $44 million contract for the Parramatta Square Project in NSW. It was further stated that $3.2 billion Parramatta Square redevelopment is one of the largest urban renewal projects in Australia and would be including 290,000 square metres of the premium office as well as retail space. The Facades division SRG has been contracted by Built Obayashi Joint Venture to design, supply and install an engineered curtain wall facade on two towers, which are located at 6 and 8 Parramatta Square. There are expectations that work would be commencing in mid-2020 and run for around 18 months.

A Merger of SRG Limited and Global Construction Services Limited: The company’s annual report stated that FY19 witnessed coming together of SRG Limited and Global Construction Services Limited in order to create engineering-led specialist construction, maintenance and mining services group. The strategic rationale of the merger was to leverage greater combined offerings of both the businesses and to target the common and complementary customers in sectors and geographies in which the company is operating. The integration was well executed, primarily with positive customer feedback, clear evidence of the work won via cross-selling of complete offering a well progression of the systems integration.  The business has been well-positioned in weathering what has been the challenging year on the numerous fronts, which includes a highly competitive environment along with the economic and political uncertainty.

Final Dividend to be paid on 23 October 2019: The Board of Directors declared a fully franked final dividend of 0.5 cents per share on August 27, 2019. The record date was September 11, 2019, and the payment date is October 23, 2019. The company has earlier declared an interim, fully franked dividend amounting to $4.407 million (or 1.0 cents per share) on February 26, 2019, and it was paid on April 23, 2019. As a result, total fully franked dividends, which were declared with regards to FY19 amounted to $6.609 million (or 1.5 cents per share). At the current market price of A$0.385 per share, the annual dividend yield of the stock stands at 3.95%. The following provides a broader overview of the company’s dividends:


Dividends (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1:EV/Sales Multiple Approach

EV/Sales Multiple Approach (Source: Thomson Reuters), *NTM: Next Twelve Months

Method 2:EV/EBITDA Multiple Approach

EV/EBITDA Multiple Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM: Next Twelve Months

What To Expect From SRG Moving Forward: The company has record work in hand, which amounted to $708 million, and the percentage of recurring revenue mix stood at 70%, which might help the company moving forward. It is also having robust pipeline amounting to $5.2 billion in the positive growth sectors, and the company is maintaining a conservative net cash balance sheet.  With the core focus towards securing the recurring and term revenues, leveraging site presence in order to deliver the expanded offering to client base as well as a disciplined approach towards work winning, 2019 laid the robust foundation from which the business of the company could transition from Optimisation Phase to Growth Phase of the strategic plan. The following picture provides an overview of the strategic horizons of the company:


Strategic Horizons (Source: Company Reports)

The company is expected to maintain a disciplined and targeted approach towards the project selection. It is also well-placed for the sustainable growth in FY20 and beyond because of record work in hand and a significant and growing recurring revenue base. The company’s top line has witnessed a CAGR growth of 34.08% in the time span of FY15- FY19 and, thus, it can be said that the company is possessing decent capabilities to garner revenues. During the same period, the company’s bottom line has witnessed a CAGR growth of 1.95%, which can be considered at respectable levels.

Stock Recommendation: The company’s stock has witnessed a fall of 23.23% in the span of previous three months, while in the time frame of one month, there has been a fall of 10.59%. Currently, the stock is trading towards the lower band of the 52-week trading range of $0.285-$0.755 with PE multiple of 16.52x and an annual dividend yield of 3.95%, proffering a decent opportunity for accumulation. The company has significant strength in its balance sheet that supports the foundation of future growth, and there are tangible assets amounting to $115.2 million. The company possesses a robust net cash position of $12.2 million because of disciplined capital management practices. There are expectations that the company might achieve respectable growth moving forward considering recurring / repeat revenues, robust balance sheet and diverse market sector exposure.

Given the backdrop of decent fundamentals and business prospects, we have valued the stock using two relative valuation methods, i.e., EV/Sales and EV/EBITDA multiples and arrived at a target price upside in the ambit of $0.42-$0.49 (lower double-digit growth (in % term)). Hence, we give a “Speculative Buy” recommendation on the stock at the current price of A$0.385 per share (up 1.316% on 11 October 2019).

 
SRG Daily Technical Chart (Source: Thomson Reuters)

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