KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

Civmec Limited (CVL SP)

Company Update (Updated 8 September 2021)

Strong fundamentals spearheading growth

  • Earnings beat. Civmec’s FY2021 net profit (YE 30 June 2021) surged 97% YoY to A$34.6mn, beating our estimates of A$33.5mn.
  • China’s iron ore appetite. Even though iron ore prices have been on a downtrend recently as Chinese policymakers attempt to cut steel production, China’s iron ore imports hit new highs in August, suggesting the country’s continued reliance on the commodity.
  • Mid and long-term drivers. Likelihood of increased contract wins as the Australian government ramps up on defence and infrastructure spending. Overall revenue supported by approximately 20% recurring income from maintenance and upgrading works. Buoyant commodity market to drive capex spending for miners.
  • We maintain an OUTPERFORM recommendation and revise our TP to S$0.90, based on an unchanged 12.0x FY2022F P/E.

2021 financial update: Outstanding results

Civmec’s revenue jumped by 72% YoY to A$674.2mn for FY2021 (YE 30 June 21) while net profit surged by 97.3% to A$34.6mn. Overall gross profit margin remained relatively flat at approximately 11%, whereas net profit margin increased from 4.5% to 5.1% YoY. Main revenue driver continues to be the Metal and Minerals sector which increased 66% YoY, making up 83% of total revenue for FY2021. Infrastructure sector’s revenue rose by 94% mainly due to the contribution from the OPV project awarded by the Royal Australian Navy, whereas revenue for the Oil & Gas sector surged by 144%, amidst the rally in oil prices in 2021.

Resources sector remain strong

As of early September, the Bloomberg Commodity Index (BCOM Index) gained a total of approximately 34% YoY and is around 5% higher compared to its 5-year high. According to S&P Global, the near-term outlook for the mining industry remains strong as pent-up demand emerges post-pandemic. As vaccination campaigns ramp up, rebounding economic activity is driving demand for many commodities, buoyed by government stimulus efforts around the world. Whereas in the longer term, the sector will capitalize on raw material needs critical to the global energy transition efforts, driven by ESG minded companies.

Customer’s capex spending to remain resilient

According to Civmec’s largest customers, such as Rio Tinto and BHP, capex spending remains unchanged in the companies’ latest financial results guidance. Capex spending for Rio Tinto is expected to be A$7.5bn for both 2021 and 2022, whereas for BHP, capex spending is expected to be US$7.3bn and US$8.5bn for 2021 and 2020 respectively. Civmec’s order book is currently at A$1.15bn as of end-FY2021, and is expected to grow given the strong repeat business from long-term clients.

Port Hedland: A mighty base

Civmec has acquired 5 hectares of land in Port Hedland to establish a permanent operated facility to focus on construction and maintenance activities in Pilbara. The facility is currently in the design phase, with A$10mn expected to be invested over 18 months. As the nature of mining sites require repair and maintenance approximately every 6 weeks, a firm foothold in the area would accelerate efficiency and minimise crossborder travelling for employees. Around A$1bn worth of recurring revenue is expected through maintenance contracts for Pilbara.

Valuation & Action

We maintain Civmec with an Outperform recommendation and a higher TP of S$0.90. Our TP is based on 12.0x P/E to its FY2022F EPS of S$0.74 (based on 0.99 SGD/AUD).

Risks

Further exacerbation of Australian-China tensions may result in trade sanctions on a wider array of Australian exports; Rising labour costs in Australia due to labour shortage may result in higher costs; Execution risks.


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