Shares in engineering & construction group SRG Global (ASX:SRG) have roughly doubled since April, recouping some rather sizable losses from the preceding 6-months. Shares had been under pressure after the newly merged group was forced to lower full year guidance due to delays in contract awards, but sentiment has since shifted on the back of a number of new contract wins.
Project delays, cost overruns, utilisation rates and uncertain tender outcomes come part and parcel with engineering service companies, particularly those involved in large, complex projects. For investors that crave any degree of earnings visibility it can be frustrating, and makes the already tricky task of valuation that much more difficult.
Still, for the disciplined investor, there can be great reward. When volatile earnings combine with material swings in sentiment, there exists the potential for significant price movements — as is evidenced by the recent surge in SRG’s share price. The question, of course, is whether further gains are likely.
SRG’s operations span a variety of segments and geographies, which offers some degree of protection against individual project risk. Further, around 45% of revenues come from asset and mining services contracts which deliver more reliable recurring cash flows.
On a pro-forma basis, accounting for the newly merged structure, revenue was ~50% higher in the first half of FY2019, with earnings before interest and tax climbing roughly 30%. SRG disclosed $520 million worth of work in hand, and a net cash position of almost $17 million.
For the full year, SRG told investors to expect EBIT to come in between $22-27 million, while EBITDA around $10 million higher. Based on the current market price, that puts SRG on an EV/EBITDA ratio of 6.9.
That’s far from demanding, especially if management are right to expect a “step change” in earnings growth in the current year, and with $4.5 billion pipeline of work from a variety of growth sectors.
Ranked #77 on Strawman, the community consensus values SRG shares at 93.5c — a good 58% above the last traded price. Click the button below to learn more…
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