Company Overview: SRG Global Limited is a company providing engineering-led specialist construction, maintenance and mining services across the entire asset lifecycle. The Company operates in three segments of Construction, Asset Services and Mining Services. The construction segment consists of supplying integrated products and services to customers involved in the construction of complex infrastructure, whereas the asset segment supplies integrated services across the entire life cycle. The mining segment provides ground solutions including production drilling, ground and slope stabilization, design engineering and monitoring services.


SRG Details   

 
 
Record Work in Hand and Recurring Project-Based Revenue: SRG Global Limited (ASX: SRG) is an engineering-led specialist construction, maintenance and mining services group operating across the entire asset lifecycle. As on 13 March 2020, the market capitalization of the company stood at ~$120.37 million. The 2019 financial year has been a year for change and challenge, which saw the coming together of SRG Limited and Global Construction Services Limited, ultimately positioning the company with a balanced portfolio of recurring and project-based revenue streams across the entire asset life cycle. In the same time span, the company had record work in hand of $708 million, with a step-change in the diversity of SRG Global’s revenue base such that its current work in hand is comprised of approximately 70% of recurring and term revenues. This change mitigates revenue and earnings volatility and hence is validating a key element of the merger rationale. During FY19, the company reported an increase in revenue to $506.4 million, up from $431.6 million in FY18. This was mainly due to TBS acquisition in New Zealand in March 2018 and acquisition of the remaining 49% of Gallery Facades in June 2018. The challenging market conditions, large scale construction projects, and carrying costs impacted adjusted EBITDA of the company, which stood at $32 million. The company also reported a strong balance sheet with cash in hand of $58.3 million and net cash of $12.2 million. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 34.08% in revenue and a CAGR of 20.48% in gross profit. The decent financial and operational performance of the company enabled the Board to declare a final dividend of 0.5 cents per share, bringing the total dividend to 1.5 cents per share for the year.

The company has also released its results for the half-year ended 31 December 2019 wherein it reported strong growth in asset services and solid operational performance in Mining Services, Specialist Facade and Civil Construction. SRG also reported a strong pipeline of opportunities with positive growth across sectors.

Whilst the market continues to be demanding; the company is building clear momentum with several significant contract wins and record work in hand. One of the primary goals of SRG is to build the level of recurring revenue to balance the current weighting towards project-based revenue. The company is targeting growth in specialist Civil Infrastructure Construction and will make selective acquisitions to complement its capability and footprint. 

Work in Hand (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of SRG Global Limited. Perennial Value Management Ltd. is the largest shareholder in the company, with a percentage holding of 14.43%. 


Top 10 Shareholders (Source: Thomson Reuters)

Good Management of Costs and Increasing Returns to Shareholders: During 1H20, gross margin of the company stood at 53.1%, higher than the industry median of 12.5%. In the same time span, EBITDA margin of the company witnessed an increase over the previous half and stood at 4.5%, up from 2.7% in 2H19. During 1H20, net margin of the company was 1.4%, up from 1% in 2H19. The higher gross margin and increased EBITDA and net margin indicate that the company is managing its costs well and is able to convert its revenue into profits. In the same time span, Return on Equity went up to 1.4% from 1% in 2H19. This indicates that the company is well deploying the capital of its shareholders and is capable of generating profits internally. During 1H20, current ratio of the company stood at 1.33x, higher than the industry median of 1.12x. This implies that the company is liquid enough and can pay off its current liabilities using current assets. In the same time span, Assets/Equity ratio of the company was 1.68x, lower than the industry median of 4.9x and Debt/Equity ratio was 0.26x as compared to the industry median of 0.59x. 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: Thomson Reuters)

SRG Global Secures $72 Million Integrated Structure Package in WA: The company has recently announced that it has secured a $72 million integrated construction package for One The Esplanade project at Elizabeth Quay for a total duration of approximately two years. Contract work is expected to commence in May 2020. The company, in another release, stated that it has executed a multi-disciplinary asset services contract with Alcoa of Australia Limited. This showcased the company’s ability to deliver multi-disciplinary integrated solutions for tier one customers.       
       
Strong Growth in Asset Services and Opportunity Pipeline: During the half-year ended 31 December 2019, the company witnessed strong growth in Asset services segment which resulted in increased work in hand by 172% in past 12 months. SRG has an opportunity pipeline of $5.7 billion across diverse growth sectors with imminent contract awards. In the same time span, revenue of the company went up by $28.6 million to $267.1 million and delivered adjusted EBITDA amounting to $12.1 million. The company also reported a strong balance sheet with a liquidity of $67.2 million and low gearing at 6%. Total work in hand increased to a record level of $737 million, a 42% increase over the past 12 months. The continued ability of the company to add work into its pipeline showcases SRG as a demanded partner in various markets and geographies. The company has declared a fully franked interim dividend of half a cent per share which is to be paid on 29 April 2020.


1H20 Financial Highlights (Source: Company Reports)

Future Expectations and Growth Opportunities: SRG Global Limited is well-positioned for sustainable growth in FY20 and beyond, supported by record work in hand and a significant and growing recurring revenue base. The company remains disciplined in its operational execution and delivery against long term strategic objectives. The business has a strong cash position which will help to target future projects and growth opportunities. The company will leverage site presence to deliver an expanded offering to the client base and is focused on maintaining a disciplined and targeted approach to project selection. 

The company is expecting near term contract wins in Mining Services, which will increase work in hand in the long term. SRG also anticipates positive growth opportunities in Asset services contract and Specialist Civil and Specialist Facades, delivering higher earnings in 2H and beyond. The company has provided guidance for FY20 with anticipated underlying EBITDA in the range of $30 million to $34 million. The increased focus of the company on recurring revenue streams has resulted in 37% of work in hand expected to be delivered in FY22 and beyond indicating a growing level of stability in the company’s long-term revenue streams. The long-term outlook of the business remains positive and the company remains disciplined in work winning, operational execution and delivery against long-term strategic objectives.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

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 SRG is trading close to its 52-weeks’ low level of $0.230, proffering a decent opportunity for accumulation. The company has secured several key term contracts in the mining services segment and is bringing its resources to meet the mining challenges. The company has made significant progress in its long-term strategy of securing a higher proportion of recurring contracts in the asset services sector and has experienced professionals who are multi-disciplined and can offer innovative maintenance solutions. Considering the trading levels, improvement in margins, record work in hand and decent growth opportunities, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at a target price offering 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 $0.250, down by 7.407% on 13 March 2020. 

 
SRG Daily Technical Chart (Source: Thomson Reuters)

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