Small Caps | Dec 11 2024
Acrow secures a major contract in an emerging segment as strong civil and infrastructure demand builds a record pipeline of projects.
-Acrow wins large new contract, record project pipeline
-Higher recurring revenues from mix shift toward Industrial Access
-Hire contract wins jump by 57% so far in FY25
-Moelis praises superior products and technical solutions
By Mark Woodruff
Management at integrated construction systems services provider Acrow ((ACF)) plans to sustain strong earnings growth by capitalising on robust civil and infrastructure demand and leveraging a record project pipeline.
In an overall high-margin business, the rapidly growing Industrial Access segment plus Formwork business leadership drive ongoing contract wins and hire revenue momentum, explained broker Moelis when initiating research on Acrow in mid-October.
A standout $56m contract with Snowy Hydro for scaffolding labour hire was a major win around 16 months ago, and management this week announced the company's second-largest Industrial Access contract, worth $42m, for the Ceres Urea Plant in Western Australia, set to become one of the world's largest urea facilities.
The term Access refers to temporary systems designed to ensure safe and efficient movement of personnel and equipment on construction sites, including modular scaffolding systems that provide vertical and horizontal access across construction sites. These and various other systems are integral to Acrow's mission of enhancing construction safety, efficiency, and project mobility.
Shaw and Partners notes the Ceres Access contract was secured through a competitive tender process, with Acrow's ownership and leasing model for scaffolding equipment being a key factor in the successful outcome.
This latest contract is a significant opportunity for profit growth within a relatively new segment, suggests the broker.
Operating across six Australian states, Acrow is one of Australia's largest formwork and scaffolding companies servicing the civil infrastructure, industrial (energy, pulp, paper, and mining), commercial, and high-rise residential sectors.
The business is divided into three segments: Formwork, Industrial Access, and Commercial Scaffold which accounted for 56%, 33%, and 11% of FY24 revenue, respectively.
Formwork relates to temporary moulds into which concrete or other material is poured to support concrete structures during construction. Revenue in this segment is generated through dry hire, renting out formwork materials and systems without operators or additional services, yielding a 70% contribution margin.
In a key leading indicator of future performance, according to Morgans, management advised at the November AGM hire contract wins increased by 57% to $33.8m in the first four months of FY25.
While FY25 guidance suggested a lower EBITDA margin, this analyst viewed this as expected given the sales mix shift toward Industrial Access, which offers lower margins but more recurring revenue, compared to the higher margin yet more cyclical Formwork segment.
Morgans emphasised management's strong capital allocation over time, with return on equity (ROE) improving to 27% in FY24 from 17% in FY20.
Competitive environment
Delivering a key point of difference from major competitors, the company has around fifty dedicated engineers providing technical solutions as well as innovative products, highlighted Moelis.
The global scaffolding and formwork market is dominated by several large multinational companies, notably Doka GmbH, Peri SE, Altrad RMD Kwikform, and Layher, while locally smaller competitors include ASX-listed Big River Industries ((BRI)) and Oldfields Holdings ((OLH)).
Moelis noted comparisons with local peers are limited due to differences in service offerings, scale, and scope of operations.
The analysts believe Acrow is undervalued compared to peers, even accounting for size and liquidity, trading at an approximate -42% discount to the median peer price-to-earnings multiple for FY25.
October's trading update
Acrow reported a 51% increase in new hire contracts in the first quarter, reaching a record $24.8m, compared to 17% growth in FY24.
Petra Capital attributed this uptick to a high conversion rate from the FY24 tender pipeline of $189m.
New contract wins highlighted the strength of Acrow's competitive position, and the benefits being derived from its broadening suite of products and services, noted Petra Capital, while providing a good lead indicator for FY25 revenues.
Given a record level of secured hire contract wins for the quarter, which followed a record level of contract wins in June, this broker envisaged upside risk to its forecasts.
The key risk to the analyst's EPS estimates remains construction project delays, noting circa $600m of road and rail project funding deferrals were a key contributor to Australia's FY24 budget surplus.
Moelis recently noted any periods of low construction activity could heighten the risk of Acrow failing to replace completed projects with new work, while margins can potentially face pressure from aggressive tendering by engineering and construction firms competing for fewer opportunities.
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