Strong Growth Outlook For Decmil

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 – Decmil set for solid earnings growth
 – Exposure to managed village sector offers upside
 – Moelis sees value at current levels
 – Other brokers to cover the stock also rate Decmil a Buy

By Chris Shaw

While mining service companies have been of particular interest to investors in recent months, Moelis notes those offering accommodation villages among their services have been priced at a premium to broader mining services exposures.

For Moelis this suggests a positive outlook for Decmil Group ((DCG)), as there appears to be upside with the Calliope village near Gladstone contributing a greater proportion of group earnings going forward. Moelis rates Decmil a Buy, with a price target of $3.30.

With respect to the Calliope village, Moelis notes expansion plans continue to suggest the planned 2,265 rooms will be installed by April of next year. Revenues for Decmil will come from both the construction contract and a 50% ownership stake, with Moelis forecasting a room rate of around $110 per night.

Feedback from management at Decmil suggests this may be a conservative estimate in terms of per room per night revenues. This offers some upside risk to earnings estimates for the division, as Moelis points out an average rate of $150 per night would add 10% for FY14 earnings per share (EPS) forecasts.

Elsewhere, Decmil should generate revenue growth from additional contracts in the LNG, coal and iron ore sectors. Moelis estimates there are around $4.0 billion of such contracts to be awarded over the coming year, with Decmil winning $280 million in new work and extensions in 1H12.

Growing credibility in the civil sector will help, Moelis suggesting a recent preferred contractor agreement with Rio Tinto ((RIO)) for 333 Program civil works will assist in boosting Decmil's status in the market.

For the current year Moelis anticipates a strong second half for Decmil, with revenues for the full year expected to increase by more than $500 million. This supports Moelis's model for solid earnings growth in coming years, as EPS are expected to increase from the 18.7c recorded in FY11 to 20.1c this year and 24.1c in FY13. 

This compares to consensus EPS forecasts according to the FNArena database of 21.2c in FY12 and 24.4c in FY13.

For Moelis, the combination of a justifiable premium for village earnings and solid earnings growth in general for Decmil is enough to justify a Buy rating on the stock. This is especially the case as the broker's EPS forecasts for FY13 imply an earnings multiple for that year of 11.8 times, which is below peers offering managed accommodation as part of their business such as Fleetwood ((FWD)) and the recently acquired Mac Services.

Also supportive of Moelis's positive view on Decmil is a strong financial position, as cash on hand at the end of 1H12 was $107.7 million and debt was just under $17 million. Cash on hand increased from $64.4 million at the end of FY11. 

Others in the market agree Decmil has a positive outlook, as both Deutsche Bank and RBS Australia rate Decmil as a Buy, Deutsche having initiated coverage on the stock earlier this month. As well as the scope for earnings growth in coming years, Deutsche is attracted to the recurring nature of earnings in Decmil's construction operations. 

Part of the attraction for RBS is Decmil continues to grow from what was a WA-centred company initially to one well on the way to operating nationally, while still maintaining earnings growth through this expansion.

While RBS is more conservative with a price target for Decmil of $2.99, Deutsche's3.25 target is much closer to the target set by Moelis.

Shares in Decmil today are unchanged with a last sale price of $2.83. This implies upside of around 10% relative to the consensus price target in the FNArena database and compares to a trading range over the past year of $1.725 to $3.85.

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