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2 Industrials Stocks Manifesting Earnings Potential – DOW, DCG

Feb 28, 2022 | Team Kalkine
2 Industrials Stocks Manifesting Earnings Potential – DOW, DCG

 

Downer EDI Limited

DOW Details

Downer EDI Limited (ASX: DOW) operates as an engineering and infrastructure service provider in Australia and New Zealand. The company operates in diverse segments comprised of Transport, Utilities, Facilities, Engineering, Construction and Maintenance (ECM), and Mining.

Material Business Updates:

  • The fallout of Probuild may have a domino effect on DOW. Probuild filed for voluntary administration due to the disruptions in the construction industry. With $30 million outstanding claims, it may be difficult to realize the dues from Probuild. DOW will assess the situation and its impact on the financial performance.
  • On February 23, 2022, Mark Binns was appointed as Non-Executive Director with effect from March 1, 2022.
  • On February 15, 2022, Adelle Howse was appointed as Non-Executive Director, effective from April 1, 2022.
  • On February 4, 2022, DOW was awarded a 3-year contract from Chorus to provide filed aservices. The work is likely to commence on April 1, 2022.
  • DOW completed the sale of its Open Cut Mining East business to BUMA Australia Pty. Ltd. for proceeds of $150 million.

Key Takeaways in H1FY22 Performance:

  • The company posted a 3% drop in revenue in H1FY22 owing to the divestment of Mining and Laundries business and underperformance of its non-core Hospitality segment attributed to the pandemic. Its Utilities segment posted a 5.6% dip in revenue over the prior year.
  • Statutory EBITDA tumbled 4.9% YoY to reach $186.2 million and EBIT margin reached 3.1% (vs. 3.2% in PcP). This was attributed to an increase in corporate costs by 8.8%.
  • Net financing costs plunged 18.4% due to lower debt drawn and a dip in interest costs. This helped to post statutory NPAT growth of 17.7% in H1FY22 to $89.0 million.
  • Gearing has declined from 19.0% in June 2021 to 16.5% in December 2021 period.
  • During the period, DOW had purchased ~15.76 million shares for total consideration of $99 million under its share buyback program commenced on June 8, 2021.
  • It had announced an interim dividend of 12 cents per share payable on March 24, 2022.

Segment Contribution (Analysis by Kalkine Group)

Key Risks: DOW is exposed to pricing risk with fixed contracts. Labor shortages may delay the project execution and lead to cost overruns. The extent of supply chain disruptions may have a lingering effect on its revenue mix. Increasing caseloads and lockdown restrictions may affect its Facilities segment.

Outlook: DOW has raked $778 million so far from the divestment program. And the sale of its Mining portfolio is the last transaction under the program.  With reduced debt levels, DOW is well-positioned to pursue its expansion plans. It had over $583 million unused debt facilities. Its diversified revenue streams and a sharp increase in the Transportation segment is expected to continue to be resilient.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of DOW has been corrected by ~12.01% in the past three months. The stock just recovered from its 52-weeks’ low price of $4.90. The stock has been valued using the P/E-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers, considering the diversified revenue streams and recent contact from Chorus.  For this purpose of valuation, a few peers like Monadelphous Group Ltd. (ASX: MND), NRW Holdings Ltd. (ASX: NWH), CIMIC Group Ltd. (ASX: CIM), and others have been considered. Considering an uptick in NPAT in H1FY22, reduction in debt levels, decent liquidity, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.970 as of 25 February 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DOW Daily Technical Chart, Data Source: REFINITIV 

Decmil Group Ltd Limited

DCG Details

Decmil Group Ltd Limited (ASX: DCG) is a construction and engineering company in Australia. It caters to the infrastructure, energy, resources, and construction sectors. It conducts its operations in two segments - Construction and Engineering, and Accommodation.

H1FY22 Performance Spotlight:

  • During the period, DCG bagged two repeated revenue contracts from the government for Barwon Heads (worth $88.7 million) and Albany Ring Road ($25 million).
  • It had ventured into resource and energy markets through Christmas Creek Hydrogen Refuelling Station project for $7 million.
  • Revenue showcased a 37% growth to $226.5 million on the back of increased order book.
  • EBITDA nosedived from $5.6 million in H1FY21 to $1.5 million as a result of mobility restrictions imposed on COVID-19 and supply chain disruptions. This is despite the company reducing its overheads to $13 million (vs. $13.4 million in PcP).
  • It had posted a net loss of $4 million in H1FY22 in contrast to a net profit of $0.6 million due to $3.4 million towards legal contractual dispute claims.
  • Cash balance bolstered to reach $12.9 million aided by $20 million drawn down of subordinated debt and capital raising of $9.8 million.
  • It had a $40 multi-option debt facility with NAB with a renewal date in July 2023. Its $20 million subordinated debt facility expires in January 2025.
  • In the recent announcement, DCG secured an $18.1 million contract from the Town of Port Hedland to construct a new community center building complex. The contract is slated to be completed in March 2023.

Key Financial Highlights (Analysis by Kalkine Group)

Key Risks: DCG is exposed to project execution risk with the supply chain disruptions to delay the procurement process for materials and allocation of key personnel. Government stimulus rollback and budget tightening may affect project wins.

Outlook: DCG has $520 million work on hand for FY24 and out of which $460 million is contracted and preferred for FY22. It has a predicable cash flow model with 76% of the project on hand being from the Government sector.  It has $4 billion under pipeline projects from energy space. DCG is focused on a repeated revenue model with existing clients. DCG mulls to increase its exposure to burgeoning hydrogen and clean energy space. DCG completed its solar farm construction in January 2022 and commenced the operation and maintenance phase.

Stock Recommendation: The stock of DCG has been corrected by ~20.0% in the past three months. The stock is currently trading closer to its 52-week low price of $0.250, indicating an accumulation opportunity. On a TTM basis, the stock of DCG is trading at 0.2x of EV/Sales multiple as compared to the industry median of 0.5x (Construction and Engineering). This signals that the stock is undervalued at current levels. Considering the focus on the repeated revenue model, increased project wins from the government sector, decent cash balance, pipeline projects, and foray into hydrogen and lithium space, TTM-based valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.255 as of 25 February 2022, 12:40 PM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DCG Daily Technical Chart, Data Source: REFINITIV

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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