What the Brokers Say – Issue 89
WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.
Forge Group Ltd (ASX: FGE) ($5.89, Mkt Cap $507 million)
We recently caught up with Forge management and were impressed with managing director David Simpson who gave a measured and articulate presentation.
We posited the key concerns of project curtailment and deferrals in the resources sector, as well as the focus on reduction of costs.
The company stated that in the mining sector Roy Hill was now the only major project in the near term looking likely to go ahead.
Instead, there is a greater focus for incremental brownfields expansion vs greenfields.
Although bidding for Roy Hill work, Forge has not factored in any numbers in its order book regarding the project.
In response to how the miners were reining in costs, Forge replied that they were seeking to liaise more directly with subcontractors, bypassing the larger manager contractor – essentially eliminating a costly intermediary.
Also there is the trend to owner-operate, which is negative for the mining contractors.
Forge does not compete in either of these areas.
The company has net cash of ca. $162 million.
It is prepared to be patient to find the right acquisition, giving itself a timeline of 12 to 18 months.
It will not be case of growth for growth’s sake, and Forge is prepared to return to capital to shareholders if no satisfactory acquisitions are identified.
Power station work remains a big focus, with the company undertaking only gas-fired work, while the company is looking to increase its contract and maintenance work, viewing it as an attractive annuity stream.
At current shareprice FGE still looks attractive relative to peers.
Recommendation: TRADING BUY Price Target $6.57
Gold Road Resources (ASX: GOR)
Gold Road Resources has released an updated mineral resource estimate for the combined Central Bore project, incorporating the Imperial Shoot, the Senate and Justinian. The upgraded estimate will be incorporated into the pre-feasibility study (PFS) work currently underway and due for completion by the end of June 2013.
A 32 per cent increase in total Central Bore project resource
In its second upgrade since establishing a maiden resource in 2011 at the Central Bore project, Gold Road reported a combined JORC-compliant resource of 813,900 tonnes at 7.7grams per tonne for 201,100 ounces contained gold, an increase of 32 per cent.
Central Bore includes the Imperial Shoot deposit which accounts for 112,200 ounces of the contained gold, an increase of 10 per cent since the previous published estimate in February 2012, at a notably higher average grade of 22.7g/t compared with 19.2g/t.
On an uncut resource basis, Imperial Shoot contributes an additional 40 per cent or 42,300 ounces to gold contained.
Importantly, of 220 RAB-drill holes used in the revised estimate, one in 10 included intercept readings of over 100g/t, which bodes well for enhancing near-term cash flows from mining higher grade portions of the ore body.
Pre-feasibility study due the end of June 2013
Gold Road continues to target production by end-2014 and has completed the necessary hydrological, geotechnical, environmental and preliminary metallurgical test work required for the currently ongoing PFS.
We expect completion of the PFS by the end of June 2013 and continue to anticipate a small scale underground mining operation at Central Bore as the most likely production scenario.
Valuation: Shares at 70 per cent discount
Our 33c per share sum-of-the-parts valuation remains broadly unchanged and comprises 8.4c per share from an NPV calculation, whereby small-scale production commences at the Central Bore by end-CY14.
We have added 24.6c per share for the now slightly higher remaining resources, derived by benchmarking forecast residual levels against global average EV/in-situ values for measured, indicated and inferred ounces for the Australian market, which is then discounted back into current money terms.
The market is applying a 71 per cent discount to Gold Road’s EV compared to global average benchmarks, which when applied to the remaining resource generates a valuation of 7.2c per share for the remaining resource and a sum-of-parts-valuation of 15.6c per share.
Decmil Group Limited (ASX: DCG)
Incorporating Browse LNG delay into our estimates Decmil Group’s Western Australian construction business is likely to be affected by the Woodside decision to delay the development of the Browse LNG project.
Additionally, the potential DCG build-own-operate village near Broome appears unlikely (we never included the village in our valuation or model, but did highlight it as significant upside risk).
To reflect the potential downside risk, we have reduced our WA construction revenue estimate from $436 million to $300 million (current FY14 order book is approx. $100 million excluding the Roy Hill village).
We still expect EDE to contribute $140 million of revenue for combined contracting revenue of $440 million.
We have increased our margin assumptions for WA construction. While this could sound counter intuitive to some, there is sound reasoning. Our gross margins assumptions are unchanged, but we have lowered our divisional overhead expense considerably.
The divisional overhead has been steadily increasing as a result of skills shortages (ie carrying the expense of a latent pool of project managers) and the rising tendering costs (cost inflation, the number of tenders and the complexity/size of tenders).
With the lower industry pipeline of projects, we expect the divisional overhead to fall significantly and, in the short term, Decmil should be able to retain this margin improvement.
As a result, our group EBITDA estimate has been more modestly reduced than our revenue estimate.
We expect FY14 EBITDA of $77.4 million (from $84.3 million) and our NPAT estimate has been reduced to $48.5 million (from $53.9 million).
Maintain Buy recommendation
We value the Queensland village at approx. $1.20 to $1.60 per share (depending on one’s EBIT multiple assumptions and the depreciation in the village).
We value the combined construction and EDE contracting business at $1.58 (based on approx. $440 million of perpetual revenue and a 6x EBIT multiple).
Combined with annual estimated overheads of approx. $11 million per annum and the cash on the balance sheet, we value Decmil at approx. $2.89 on a multiple basis.
We see an additional approx. $0.50 of upside from better than expected contracting and another approx. $0.80 if the company secured another owned and operated 1,000 man village at cost (for example the final stage of the Gladstone village).
We have a twelve month price target of $3.03 and maintain our Buy.
Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.