Civmec Limited

Kim Eng on 3 Jul 2012

Positive impression from plant tour. We visited Civmec Limited’s (Civmec) integrated sea-front yard facility in Henderson, Western Australia last week. As a company with a relatively short operating history, Civmec has achieved highly commendable financial performance and its share price has more than doubled since it listed in April 2012 at an IPO price of SGD0.40. We have an overall positive impression after witnessing its operational capabilities and the scale of its modern production facilities.

Riding on Australian energy and mining boon. Civmec is benefiting from the energy and mining boon in Australia which is drawing huge investments in mega-projects in the respective sectors. As at Dec 2011, the total value of investment projects underway exceeded AUD913m, of which 45% are in the oil and gas and mining sectors. This should continue to fuel orderflows for Civmec with many of these projects expected to go into peak modes in 2013.

Strong competitive advantages. We believe that Civmec’s competitive advantages lies in its experienced management team, strategic location of its facility in Western Australia, strong execution and timely delivery of projects, thereby winning strong affirmation and repeat orders from international customers, which include Chevron, Cameron, BHP Billition, Rio Tinto and Leighton.

Risk and concerns. Concerns were raised on falling gross margins and risk of cost overruns. Management explained that it is taking on larger scale and higher value project which have lower margins to grow its revenue base. Cost overruns are minimised with active monitoring while labour cost escalation is predictable and controlled with fixed labour agreements.

Premium valuation supported by optimistic outlook. With the runup in share price, Civmec is currently trading at annualised FY6/12F PER of 15.3x. This is essentially higher than peer average. However, given the positive sector outlook, there is every opportunity for Civmec to achieve higher earnings in coming years.