Decmil Group Limited

DCG Details

AGM Announced: Decmil Group Limited (ASX: DCG) provides various services such as engineering and construction, accommodation services, and maintenance to Australia's infrastructure and resources industries. DCG will hold a virtual Annual General Meeting for FY21 on 11 November 2021.

New Contract Declared: The company recently obtained a new contract worth $88.7 million from MRPV (Major Road Projects Victoria) for the Barwon Heads Road Upgrade Work Package 1, between Barwarre Road and Settlement Road. DCG will commence the contract work immediately and estimates to complete in FY23. With this contract, DCG strengthens its relations with the Victorian Government and keeps track of increasing government spending on infrastructure projects.

FY21 Takeaways:

• New Contract Wins: The company obtained $350 million new contracts in FY21. The order book stands at ~$570 million as of 30 June 2021 compared to $446 million as of 30 June 2020.
• Improved Gross Profit Margin: The Normalised gross margin rose to 10.8% in FY21 versus negative 0.2% in FY20.
• New Board: DCG appointed Andrew Barclay as the Chairman, Dickie Dique as the MD & CEO, and Peter Thomas as the interim CFO & Director to build expertise and governance for long-term growth.
• Consolidation in FY21: As a result of consolidation and significant restructuring in FY21 starting from January 2020, DCG has eliminated ~$14 million overhead costs on an annualised basis.
• Reduction in Net Debt: DCG had an overall net debt position of $8.1 million as of 30 June 2021 versus $18.7 million as of 30 June 2020, primarily due to the $24.3 million repayment of surety bonds.

Update on Ongoing Disputed Contracts:

- DCG is pursuing claims against Schneider Electric regarding a supply agreement and advancing on arbitration proceedings with Southern Cross Electrical Engineering.

- DCG and SSF (Sunraysia Solar Project trust) are also trying to resolve the dispute via a deferred arbitration and project completion deadline in late October 2021.

Net Cash Used in Operating Activities Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces COVID-19 related project delays, workforce mobility issues, and a shortage of skilled labour, essential supplies, and construction components.

Outlook:

• The company forecasts ~$500 million revenue in FY22 and intends to maintain an 8-9% gross margin in FY22 and further based on increasing contracts across the Resources, Infrastructure, Energy, and Construction sectors.
• For FY22, DCG has ~$400 million contracted work in hand and ~$40 million tax shield to boost its bottom-line prospects.
  

Stock Recommendation: The stock of DCG gave a negative return of ~24.17% in the past three months and a negative return of ~37.83% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $0.340. On a TTM basis, the stock of DCG is trading at a price to book value multiple of 0.4x, lower than the industry (Construction & Engineering) median of 1.9x, thus seems undervalued. Considering the low trading levels, rise in gross profit, improved NPAT, reduced net debt position, new contract wins in FY21, order book for FY22, valuation on a TTM basis, and key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.345, down by ~1.429% as on 11 October 2021.

Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and consider the associated litigation, COVID-19 challenges, and regulatory risks.

DCG Daily Technical Chart, Data Source: REFINITIV  

Transurban Group

TCL Details

Issue of Shares to KMP: Transurban Group (ASX: TCL) owns, operates, and develops electronic toll roads intelligent transport systems. On 5 October 2021, TCL issued 5,100 shares to Simon Moorfield, a key management personnel (KMP), at no cost on vesting of employee incentives under the Transurban Performance Awards Plan in TCL.

Issuance of Shares:

On 30 September 2021, TCL has proposed to issue ~71.79 million new shares as per the retail component of the Entitlement Offer. Recently, TCL raised $3.97 billion from the institutional component of the Offer and opened the Retail component on 27 September 2021 at $13.00 per share. The Retail offer was closed on 8 October 2021.

Potential Advantages & Highlights from the WestConnex Acquisition:

• TCL expects more than $2.0 billion of potential Capital Releases between FY21-FY25 from its assets. Currently, TCL estimates to gain more than $600 million of potential capital releases until FY25 due to its increased stake in WestConnex.
• The company estimates the deal to be free cash per security accretive in the near, medium, and long period.

FY21 Results:

• Project Advancement: The company opened M8 and NorthConnex- the two most extended tunnels projects in Australia and advanced on seven projects for development or delivery in Australia and North America in FY21.
• Recovery in Traffic Levels: The company witnessed recovery in its overall traffic volumes across FY21, led by Sydney and Brisbane and returning to pre-COVID-19 levels.
• Total Dividend Distribution: TCL paid a final dividend of 21.5 cents per stapled security, taking the total distribution to 36.5 cents per stapled security in FY21.
• Reduced Gearing Level: in FY21, TCL divested 50% of the Transurban Chesapeake (TC) assets leading to a reduced gearing level from 35.8% as of 30 June 2020 to 34.3% as of 30 June 2021.

Total Revenue & Net Income Trend from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces disputes between parties on the ongoing West Gate Tunnel Project in Melbourne, leading to the relocation of utilities and changed requirements. The ongoing COVID-19 and environmental factors also post a challenge in the smooth construction of infrastructure.

Outlook:

• The company estimates 15.0 cents per share (cps) distribution for 1HFY22 and is in sync with the Free Cash excluding Capital Releases in FY22.
• TCL expects traffic performance to remain susceptible to Government’s response to COVID-19 and the macro-economic scenario.
• TCL estimates to close the acquisition deal of WestConnex in October 2021. The company plans prudent debt management and diversification of funding sources to minimize financing and liquidity risk.
• TCL has a pipeline of opportunities advancing in the core markets and aims to invest carefully with the available liquidity.

Valuation Methodology: EV/Sales 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 TCL gave a positive return of ~1.72% in the past six months and a positive return of ~6.31% in the past nine months. The stock is currently trading slightly lower than the 52-weeks’ average level of $12.257 - $15.505. The stock of TCL has a support level of $13.450 and a resistance level of $14.360. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of a single-digit upside (in % terms). The company might trade at a slight discount than its peers’ mean EV/Sales multiple, considering the decline in free cash flows, the impact of COVID-19 restrictions, increased project costs, and the ongoing challenges on the West Gate Tunnel project. For this purpose of valuation, few peers like Sydney Airport (ASX: SYD), Atlas Arteria Group (ASX: ALX), Dalrymple Bay Infrastructure Limited (ASX: DBI), and others have been considered. Considering the current trading levels, new projects in development/ delivery, valuation, potential benefits from the acquisition of WestConnex and an expanded portfolio, we recommend a ‘Hold’ rating on the stock at the current market price of $13.790, up by ~0.072%, as on 11 October 2021.

TCL 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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