Lacklustre half yearly, but the future is bright19 February 2012
A lacklustre half yearly result from Forge Group (ASX:FGE) on Thursday:
- Revenue up 12% on the previous corresponding period to $227.8m
- NPAT remain unchanged at $21.2m (25.4 cps)
- Dividend up 50% to 6cps
Some may say the result is even disappointing. But I feel that they are clearly gearing up for growth over the next few years. A major driver of the growth will come from the recent acquisition of CTEC. Here's a summary of the deal at hand:
- Acquisition cost is up to $38.6m. $16m up front, the other $22.6m is dependent on NPBT performance in FY12 and FY13 and will be funded entirely from the profit contributions of CTEC (~50% NPBT).
- Funded by existing cash reserves.
- It's likely to contribute $200-250m of annual revenues and $15-20m EBITDA in the first full year of ownership.
- What Forge receives is exposure to the energy and utilities sectors, a footing in Queensland and a $600m order book to be billed over the next 30 months.
- What CTEC gets, apart from the cash, is someone to provide bank guarantees or insurance bonds required by a few projects to a maximum tune of $25m.
With the acquisition, the additional order book is a big factor. It essentially doubles the outstanding work for the company to a massive $1.2 billion. The order book from CTEC will comprise mainly of low-risk low-margin EPCM work especially in the power generation area. The kicker in the deal is that a substantial portion of this will be sub-contracted to Forge's subsidiaries as higher margin EPC work. This will allow Forge to extract more from the acquisition while enhancing the reputation of its subsidiaries in the energy and utilities sectors.
Management will bring out more details in the not too distant future, including likely earnings implications. I'm going to have a bit of fun and come up with some guesstimates, based on the following assumptions:
- Management stated that CTEC will contribute $15-20m EBITDA per annum. Assume that as the order book decreases, there will be an amortisation charge of $3m/annum and that the full tax rate of 30% will be applied. The midpoint of the range is $9.25m NPAT/annum.
- The net profit margin for FGE subsidiaries Cimeco and Abesque is 10.12%. This is based on figures from page 16 of the recent half yearly report. With the assumption that all intersegment revenues and profits are between these two divisions and the full 30% tax rate is applied.
- Management have stated that $35m of subcontracts have been awarded to Cimeco from CTEC and that the expectation is that that number will increase to over $100m over the next 12-18 months. My assumption will be that $100m of internal revenue per annum is going to be passed from CTEC to Cimeco and Abesque. At a 10.12% NPAT margin this will result in an NPAT contribution of $10.12m.
So with all the assumptions above, my guesstimate for the CTEC acquisition contribution is $19.37m per annum. This will essentially increase FGE's earnings by 50% in the coming years. The company's order book, excluding CTEC, is currently $600m which in itself is double the size for the previous corresponding period of $275m. All this, along with the FGE/CLO JV being in the box seat for the $500m+ Roy Hill Package 3 works, bodes well for a bright future.
FGE last traded at $5.53, down over 5% since the release of the half yearly.