Company Overview: SRG Global Limited (ASX: SRG) provides a suite of engineering-led specialist asset services, mining services and construction services throughout the entire asset lifecycle. The company carry out its operations through three segments with a revenue contribution of ~51.22% from construction services, ~32.80% from asset services, and ~15.96% from mining services. The company was listed on ASX in August 2007.

SRG Details

Diversified Service Offerings and Strong Financial Position to Aid Future Business Growth:  The company is in the strongest position in its history, which has been backed by annuity-based earnings, a large pipeline of opportunities and a strong and stable Board, Executive and Management. The company’s specialist nature of business and the diversity of service offering, the operative sector and its geographic spread has helped the company to battle with the impact of COVID-19 and labor challenges. During FY21, the company cemented its financial position, evident by net a cash position of $12.2 million from the net debt position of $8.4 million as on 30 June 2020. The company seems to be well-financed for future growth, underpinned by improved liquidity of $88.2 million and an additional undrawn $27.7 million of equipment finance facility. At the end of FY21, the company recorded work in hand of ~$1 billion, reflecting a rise of 41.5% since 30 June 2020. The company believes that its business is incredibly resilient and is in a decent position to take further significant steps forward over the next few years.

Insights of FY21:

• During the year ended 30 June 2021, the company posted strong numbers, supported by new contract wins, strong operating cashflows and continued margin improvement through delivering for its blue-chip client base.
• During FY21, the company recorded a growth of 4% and 61% in revenue and EBITDA to $570 million and $47.1 million, respectively.
• SRG witnessed a movement to net cash position against net debt in FY21 in spite of the working capital investment to aid the commencement of contract wins of over $750 million.
• On the back of decent results, SRG paid a fully franked final dividend of 1 cent per share, which took the final dividend to 2 cents per share.

Revenue by Geography (Source: Analysis by Kalkine Group)

Rain of Contracts: In the past few months, the company secured numerous contracts across all the business segments, which are likely to grow topline in the upcoming periods.

• As announced on 10 February 2022, the company secured a ~$150 million mining services contract with OneSteel Manufacturing Pty Ltd. The work includes the provisioning of specialist drill and blast services across multiple mines locations.
• In the month of December 2021, SRG won a contract of $30 million in the defence sector, which will run for around 9 months, and the scope of work includes structuring works at the Navy Training System Centre at HMAS Stirling and the Capability Centre at Henderson. The company has also secured two facade contracts in Melbourne of ~$20 million.

Segmental Growth: During FY21, the company witnessed decent growth in all business segments as depicted in the below picture:

Segments Performance (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 45.43% of the total shareholding, while the top 4 constitute the maximum holding. Perennial Value Management Ltd and First Sentier Investors. are holding a maximum stake in the company at 14.99% and 6.57%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: SRG recorded a current ratio of 1.17x in FY21 as compared to the industry median of 1.12x. Cash cycle for the year stood at 28 days in FY21 against 36 days in FY20.  On the leverage side, the company recorded a debt-to-equity ratio of 0.26x in FY21 as compared to the industry median of 0.70x.

Liquidity and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Failure of Contract: The company’s operational and financial performance could be impacted by a failure in delivering contract services.
• Funding Risk: SRG requires an ample amount of funds in order to deliver contract commitments in an efficient manner. Hence, the non-availability of funds could lead the business to operational risk.
• Regulatory Risk: The business is also exposed to a more complex regulatory environment; any failure could lead the business to fines, penalties, etc.

Outlook: The company believes that it is well-positioned for long term sustainable growth with two-thirds annuity-style earnings and positive exposure to a diverse range of sectors and geographies. For FY22, the company expects to report EBITDA growth of ~15% against FY21. The asset services segment is delivering step-change growth in diverse sectors with blue-chip clients while mining services is operating in high demand, high-quality growth commodities. Looking forward, the company would be focused on specialist civil engineering opportunities such as Dams, Bridges and Tanks. At the end of FY21, the company had work in hand of $1 billion and is positive about the pipeline of opportunity of $6 billion across all segments as on 30 June 2021. In addition, SRG’s strong liquidity position is likely to support future working capital requirements.

Work in Hand and Opportunity Pipeline as on 30 June 2021 (Source: Analysis by Kalkine Group)

Technical Analysis: SRG price broke the downward sloping trend line, and the prices are sustaining above the same from past two days that indicates bullish momentum for the stock. Prices are also trading above its 21 and 50 period SMA that also indicates that stock is trading in an upward trend. RSI (14-period) is hovering at ~53.84 level that indicates the stock is trading in a positive momentum. Immediate support levels are AUD 0.445 and AUD 0.410, while immediate resistance levels are AUD 0.525 and AUD 0.585.

Stock Recommendation: The stock of SRG is currently trading around its 52-week low level of $0.420, offering a decent opportunity for accumulation. The stock has been corrected by ~4.80% in the past six months, respectively. On a TTM basis, SRG has an EV/Sales multiple of 0.4x against the industry median (Industrials) of 1.9x. Thus, it can be said that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, growing revenue and EBITDA, strengthened financial position, decent order book, optimistic long-term outlook, improving debt to equity ratio, current trading levels, technical factors mentioned above, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.485, as on 11 February 2022, 10:45 AM (GMT+10), Sydney, Eastern Australia.

SRG Daily Technical Chart, Data Source: REFINITIV 

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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