Civmec

UOBKayhian on 5 Jul 2012

Key takeaways from yard visit in Henderson, Perth, Australia:
· In a sweet spot. We visited Civmec’s fabrication yard in Henderson, Perth, Australia. Civmec operates the largest covered, sea-front fabrication yard in Western Australia, which comprises 70,000 sqm of waterfront land in the Australian Marine Complex (AMC) and 29,000 sqm of covered fabrication space. Civmec is poised to benefit from a surge in mega offshore and mining projects coupled with a lack of manufacturing capacity along the country’s Western coastline.
· Orders set to surge. We expect Civmec’s orderbook to swell significantly as certain major offshore and mining projects come up for tender this year. We believe that Civmec could clinch contracts for subsequent phases of the Gorgon project, and may be a beneficiary of other liquefied natural gas (LNG) developments in the pipeline such as Inpex’s Ichthys project and Woodside’s Browse project. As of 31 Mar 12, Civmec’s orderbook amounted to S$233m, of which S$85m will be recognised in FY12 and the remainder will be recognised in FY13.
· Expanding product offering. Civmec will invest S$6.0m from its IPO proceeds in a new corporate office situated next to its fabrication yard. In addition, the group will invest S$3.0m into fixed assets for expansion into Structural, Mechanical and Piping (SMP), which is a process capability which will allow Civmec to bid for higher-valued projects. Lastly, we believe that a recent JV with Cape Australia Investments Pty Ltd will also enable Civmec to provide a fully integrated suite of capabilities.
· Challenges from carbon tax, high labour costs. Australia recently imposed a carbon tax amounting to A$23 per metric tonne of greenhouse gases produced, which will impact Civmec’s cost of electricity as well as the profitability of their customer’s projects. However, according to Offshore Magazine, the impact of this tax is expected to be marginal. Another major challenge for Civmec would be labour costs, which the group will mitigate through prudent project planning and labour allocation.
· Solid management team. Civmec is run by managers with strong operational experience. The executive chairman, CEO and COO all have over 17 years of experience in fabrication and construction projects.
Valuation
· Historical valuations in-line. Based on annualised historical 9MFY12 earnings, Civmec is trading at 13.7x PE, slightly higher than its peers’ average of 12.8x. However, we believe there is value in the stock if Civmec is able to deliver further orderbook and earnings growth.