Company Overview: SRG Global Limited (ASX: SRG) is a company from the industrial sector and is an engineering-led specialist construction, maintenance and mining services group that operates across the entire asset lifecycle. Some of the key sectors in which SRG Global operates in have high levels of activity and investment in the medium-term are Infrastructure Construction, Infrastructure Maintenance, Water, Oil and Gas, Energy, Mining and Transport sectors. The construction segment consists of supplying integrated products and services to customers involved in the construction of complex infrastructure, whereas the asset segment supply integrated services across the entire lifecycle. 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 Strong Balance Sheet: SRG Global Limited (ASX: SRG) is an engineering-led specialist construction, maintenance and mining services group operating across the entire asset lifecycle. As on 3 April 2020, the market capitalization of the company stood at ~$93.62 million. 2019 has been a year of significant transformation for the business involving the creation of SRG Global by unifying and refreshing of SRG Limited (SRG) and Global Construction Services Limited (GCS). The company has an exceptionally diverse capability and skillset and is very disciplined and focused on its long-term strategy to create a balanced business portfolio with a mix of both recurring and project-based revenue streams. During FY19, the company reported a record work in hand of $708 million, and a step-change in the diversity of SRG Global’s revenue base such that its current work in hand comprised of approximately 70% of recurring and term revenues. During FY19, revenue of the company went up to $506.4 million from $431.6 million. This was mainly due to TBS acquisition in New Zealand and the acquisition of the remaining 49% of Gallery Facades. In the same time span, adjusted EBITDA and EBIT of the company stood at $32 million and $22.5 million, respectively. These were impacted by challenging market conditions, delays in the construction of large-scale projects and carrying costs of maintaining capability. The decent financial and operational performance of the company enabled the Board to declare a final dividend of 0.5 cents per share, bring the total dividend to 1.5 cents per share for the year. SRG also reported a robust balance sheet with cash in hand of $58.3 million and net assets of $252 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, reflecting company’s financial strength and sustained focus on growth. 

The company has also released its interim results for the period ending 31 December 2019 wherein it reported a robust balance sheet with liquidity and steady growth in Asset Services.  SRG also reported decent operational performance in Mining Services, Specialist Facade and Civil Construction and has a strong pipeline of opportunities across growth sectors. 

The company is ensuring the sustainable success of SRG Global well into 2020 and beyond and is building clear momentum with several contract wins and record work in hand. SRG Global Limited is aiming to develop the level of recurring revenue to balance the current weighting towards project-based revenue. 


FY19 Financial Highlights (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)

Decent Liquidity Levels and Increasing Increased Profitability: During 1H FY20, 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 1H FY20, 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, current ratio of the company stood at 1.33x, higher than the industry median of 1.06x. This implies that the company is liquid enough and can pay off its current liabilities using its current assets. During 1H FY20, Return on Equity went up to 1.4% from 1% in 2H FY19. This indicates that the company is well deploying the capital of its shareholders and is capable of generating profits internally. In the same time span, Debt/Equity ratio was 0.26x as compared to the industry median of 0.59x and Assets/Equity ratio of the company was 1.68x, lower than the industry median of 4.9x. 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: Thomson Reuters)

SRG Global secures $70 Million Drill & Blast contract with Saracen: The company has announced that it has been awarded a new five-year drill and blast contract with Saracen Mineral Holdings Limited of around $70 million. Under the terms of the agreement, SRG will provide specialist drill and blast services including production drilling, explosives supply and management as well as grade control drilling to Saracen. This contract will further diversify SRG’s customer base and will add to its long-term work in hand. The company has also been awarded an integrated construction package of $72 million with The Esplanade project at Elizabeth Quay to complete concrete structure and the design, supply and installation of engineered curtain wall façade. 

Decent Increase in Revenue and Strong Operational Performance: The company has recently released its interim results for the period ending 31 December 2019 wherein it reported an increase of $28.6 million in adjusted revenue to $267.1 million and reported an adjusted EBITDA of $12.1 million. In the same time span, the company reported robust growth in Asset Services with an increase of 172% in work in hand in the past 12 months to $737 million. This resulted in both increased profits and working capital investment. During 1H FY20, the company reported strong operational performance and margin improvement in Mining Services Segment while the construction segment was impacted by continued carrying costs vs timing of project awards in the WA Structures division. During the half-year, the company reported an opportunity pipeline of $5.7 billion across growth sectors with imminent contract awards and a strong balance sheet with the liquidity of $67.2 million and low gearing at 6%. The company has also declared a fully franked interim dividend of 0.5 cents per share. 


Record Work in Hand (Source: Company Reports)

Future Expectations and Growth Opportunities: SRG Global Limited is very well positioned for sustainable growth with record work in hand and a strong opportunity pipeline in the coming years, underpinned by a significant and growing recurring revenue base. The company expects increased work in hand with imminent awards of Western Australian building construction contracts, and near-term contract wins are anticipated for the Mining Services Segment, which will further enhance the long-term work in hand.

The company has a positive long-term outlook for the diverse sectors and geographies and will continue to invest in innovative technology. It is also targeting growth in specialist civil infrastructure construction and will focus on selective acquisitions to complement capability and its presence across the globe.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation Approach


Price to Earnings 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 $0.170, proffering a decent opportunity for accumulation. Despite the uncertainty in the global markets because of the outbreak of COVID-19, the company remains in a robust financial position to navigate these uncertain times. It has significant available liquidity and headroom in its bank covenants and maintains strong relationships with its lenders. The company is continuing the operational delivery of most services or Construction, Asset Services and Mining Services. Considering the trading levels, improvement in margins, decent financial position and long-term outlook, we have valued the stock using the price to earnings based relative valuation approach and have arrived at an indicative target price of lower double-digit growth (in percentage terms). Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.23, up by 9.524% on 3 April 2020. 

 
SRG Daily Technical Chart (Source: Thomson Reuters)

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