Small Caps | Oct 11 2011
– GR Engineering a small cap engineering and project management specialist
– Unusual business model offers advantages, according to Macquarie
– New contract wins mean most of forecast FY12 revenue in hand
– Macquarie retains Outperform rating
By Chris Shaw
GR Engineering ((GNG)) is a Perth based company specialised in engineering, project management, design and construction. With a market capitalisation of a little under $300 million there is little attention paid to GR Engineering by the broader market, as the FNArena database shows only Macquarie offers coverage of the stock.
Macquarie rates GR Engineering as Outperform, attracted in part to what is seen as an unusual model for an engineering company. As Macquarie notes, GR Engineering is mainly an EPC or lump sum rather than an EPCM or cost plus company in terms of how it contracts its business.
It is the stockbroker's view this means GR Engineering has limited direct competition. It also gives management greater insight into cost, scheduling and design issues. This supports margins and return on equity, which Macquarie estimates were 19.9% in earnings before interest and tax terms for the former and better than 50% for the latter.
The business structure also makes GR Engineering's capex light, something Macquarie suggests should support a future dividend payout ratio of 50-60%. Low capex requirements also means a solid financial position, Macquarie estimating net cash on balance sheet stands at around $35 million at present.
Given a positive outlook for capital spending in the gold and base metals sectors and geographic opportunities open to GR Engineering, Macquarie expects solid earnings growth in coming years. Earnings per share (EPS) forecasts currently stand at 15.8c for FY12 and 7.5% for FY13.
GR Engineering on Friday announced $55 million in new work across three jobs, two in Australia and one in West Africa. Macquarie estimates this means almost all of expected revenue for FY12 of about $164 million is now in hand. EPS forecasts are unchanged as Macquarie had factored new contract wins into its numbers.
Earnings estimates may yet prove conservative, as GR Engineering is currently working on 25 studies, of which 10 are late stage studies. Macquarie estimates these late stage studies could convert into $900 million in EPC work.
This is apart from the potential $360 million in work from the Moly Mines project previously announced with China's CACS Corporation. The solid medium-term growth potential for GR Engineering from additional contract work is the other driver of Macquarie's positive view.
Shares in GR Engineering have traded inside a trading range over the past year of $1.65 to $2.30.
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