Civmec Limited (CVL SP/CIVM.SI)
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$1.0bn 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.
Iron ore prices. Iron ore prices have been declining since its all-time high in June 2021 of around US$1,387 per tonne, mainly due to China’s crackdown of commodity prices and restrictions on steel production as means to curb carbon emissions. However, iron pre prices remain approximately 9.4% higher than the 52-week low of US$810 per tonne. While Australian-China tensions continue to creep in, coupled with the recent slight contraction of China’s Manufacturing PMI from 50.4 in July 2021 to 50.1 in August 2021, overall sentiment suggests that China’s demand for raw materials might overall be weaker this year compared to last year.
Strong fundamentals outweigh short-term weak sentiment. Despite declining iron ore prices, the value of China’s iron ore imports hit new highs in August, worth a record US$20bn, according to government data released Tuesday. Furthermore, the overall commodity market remains strong. Lithium, whose prices have soared 98.9% YTD has remained relatively resilient in the past month given that demand for electric vehicles is on the rise. Meanwhile, aluminium futures extended a recent rally to rise above US$2,740 a tonne in September, the highest since May 2011, amidst growing demand boosted by massive global stimulus measures and climate change investment, shipping disruptions and tight supply disruptions and tight supply.
Even though iron ore prices may be on a downtrend, overall buoyant commodity prices are expected to extend support to top line growth for Civmec’s customers and in turn, result in resilient capex spending which translates to revenue growth for Civmec.
OUTPERFORM by KGI Research. Share price closed at $0.665.