Below is copy of the first page of a very positive coverage initiation report from BBY - You should always read the full report however:
BEGINS:
Initiation – tough times are priced in.
Calibre Group Limited (CGH) listed on ASX on 2 August 2012 with an issue of 46M shares at A$1.63/sh. This was just before the Great Global Slowdown (GGS) took hold and has seen all companies with exposure to resources severely downgraded. In our view, the downgrade suffered by CGH is too severe and does not give CGH credit for its ability to make acquisitions which diversify earnings away from resource related developments. It prices in a decline in revenue in FY15 of 62% to levels not seen since 2008. We initiate coverage with a STRONG BUY recommendation and a 12month target price of A$1.45/sh based on a FY15 new project related consulting revenue decline of 50% and 2% growth thereafter. Our 12 month target price implies a FY13 PE of 7.7x reported or 6x adjusted earnings.
Key Points:
- High cash generation. CGH’s business is a low capital expenditure business which should produce surplus cash to support a dividend payout ratio in line with management guidance of 55-65%. The forecast yield for FY13 is based on prospectus forecasts and a payout ratio of 60%. At current share prices the yield is 9.3% fully franked.
- No debt. The initial capital raising of A$75M means that CGH starts its life in the public domain with minimal debt and the ability to fund acquisitions. The G&S acquisition announced on 10 October 2012 was funded with $39.2M of cash and 14.2M shares. There is a contingent payment of between A$11M and A$18M and CGH will assume A$26.1M of debt from G&S.
- Business drivers. The CGH business at float was almost exclusively driven by new resource developments in mines and in rail and port infrastructure. The growth in development expenditure is expected to be the major contributor to the expected increase in underlying NPAT (before amortisation) from 2009 to 2013 of 137%. The acquisition of G&S sees revenue from asset management services increase to 34% of total revenue in FY13, compared with 10% in FY12.
- Development expenditure continues. In recent times the focus has been on project cancellations rather that continuing expenditure. The ABS resources expenditure intention survey still has resources expenditure growing at 33% in FY13 compared with the A$81.2B spent in FY12. ABS data suggests that about A$250B of resources related expenditure is either under construction or committed.
- Customers. In FY12, the revenue from three key customers comprised 69% of total revenue - Rio Tinto (35%), BHP (18%) and Fortescue (16%). The work done was almost exclusively related to iron ore projects. The acquisition of G&S has added more blue chip clients to the mix including Anglo American, Xstrata and Peabody. We expect further customer diversification as acquisitions are made to expand into areas where revenue is likely to be recurring.
- Growth opportunities. Growth opportunities include broadening of services to build recurring revenue streams, industry consolidation and expansion into other geographies.
ENDS
CGH Price at posting:
$1.13 Sentiment: None Disclosure: Not Held
