SRG Global Limited (SRG.AX) Earnings Call Transcript & Summary

Thank you very much, and welcome, everyone, to the call today. I appreciate people bringing in to discuss the acquisition of TAMS today. It's a really exciting day for us as a business. I know there will be a number of TAMS people on this call today and really looking forward to you joining the SRG Global family and really excited about the future ahead. So who are TAMS, let's start on Slide 1 with a bit of an overview of TAMS. The business, they're end-to-end diversified marine infrastructure services business with full self-perform capability. They've been around for more than 25 years, 500 people, 6 strategic shore bases and revenues of circa $200 million, EBITDA of $35 million and EBIT of $30 million. I think most importantly, 90% of that revenue is from multiyear term contracts and clients come with $600 million work in hand, a $3 billion opportunity pipeline. A terrific management team have all come with the deal with a long track record and industry experience and underpinned by a business that's very capital light with CapEx circa 2% to 3% of revenue. If we move to Slide 2, which is the overview of the acquisition itself. Firstly, starting with the transaction details. It's an $85 million acquisition on a cash-free, debt-free basis. That's an implied acquisition multiple of 2.7x EBITDA and 3.2x EBIT. TAMS is expected to deliver circa $200 million on a pro forma basis in FY '26. It's important to note that, that is on a full 12-month basis. We'll only have TAMS for 8 months of this year as it concludes on the 31st of October. From a funding perspective, the $85 million acquisition is being funded through cash debt and shares. It's just a bit over $57 million in cash and debt and $27.7 million of scrip issued to the vendors that will be escrowed for 2 years. That's one of the key parts of the deal was very much a believer in SRG as well. It was almost us investing in each other, and we're very keen to take a good portion of scrip. There is also a 2-year earn-out opportunity, which is 100% of EBITDA between $30 million and $40 million and 50% of EBITDA above $40 million. I'll touch through the deal metrics a little bit later on in the presentation and some of the scenario analysis. So how do we look post this deal? We have revenue of circa $1.65 billion, EBITDA of circa $175 million and EBIT of $135 million. It's a highly accretive deal with EPS accretion of circa 25%. It's margin accretive from a percentage perspective, EBITDA margins going from 9.7% to 10.6% and EBIT margins from 7.2% to 8.2%, continuing the industry-leading margin performance. We'll move from a net cash position to very modestly geared at 0.3x net debt to EBITDA, and we're updating our guidance today to $163 million of EBITDA, at least, which includes 8 months contribution from TAMS and $125 million EBIT perspective. So why have we done this? What's the strategic rationale? Firstly, it's a transformational acquisition of a leading marine infrastructure services provider, one of the absolute most sought after in their field. There's a clear strategic fit with complementary self-perform delivery capability, naturally complementary technical skills and expertise and unlocks a range of cross-selling opportunities for both TAMS and the broader SRG Global Group. It gives us an immediate market leadership position in highly attractive growth markets, proven track record of delivery over a long period of time, a terrific strong management team who are all coming with the deal, the founder, who is the major shareholder has been out of the business from day to day for a number of years. So all key management are moving company across with the business. It plays in highly attractive sectors, good growth markets, resources, energy, transport, water and defense. I'll touch on some of those more a bit later on in the presentation. The geographic footprint of the critically located shore bases of TAMS gives a huge competitive advantage and strategic moat. That's something that's very difficult to replicate, really diversifies and enhances the recurring earnings profile of the group with high annuity style earnings, 90% of revenue secured under term contracts and it's a highly accretive acquisition with a capital-light business model. As I mentioned earlier, circa 25% EPS accretive pre any synergies or cross-selling opportunities, really complements our current growth strategy and highly attractive thematics. It's very conservatively funded. It's a capital-light business with CapEx circa 2% to 3% of revenue. That's kind of, I guess, the detailed strategic rationale. I think we move to Slide 4 and the reality, it's very aligned to the overall strategy of the group. I've been putting up this slide for a long period of time, and you can really see the TAMS acquisition very aligned to what we're trying to be as a company. Long-term growth in maintenance, industrial services, targeted growth in engineering and construction, really leveraging our capability and footprint, particularly in the water space, selective acquisitions that complement capability and footprint. You can clearly see the evidence of that today, consistent above-market returns for shareholders and really fits our profile of that sort of 8% of recurring style earnings. But I think most importantly for us, it's very much aligned to us. And I'm really talking about the cultural aspect here is generally where these things succeed or fail. TAMS is very much us. You take a look at who TAMS are, a marine infrastructure specialist, long track record, absolute full self-perform end-to-end capability that play across the entire asset life cycle, maintenance, engineering construction and subsea services. And they are very much the most sought after in their space as technical experts and absolute infrastructure partner. And that will be very much our focus in the first 6 to 12 months is that cultural integration, but having met some of the key management, TAMS are very much us. If we move to Slide 6 and delve a little bit more into the detail of what TAMS do. They do provide critical marine infrastructure services. I think that's the key thing when you think about SRG Global as a group, it's about providing critical services for our clients. What TAMS does is provide critical services in the marine infrastructure space. It's a full offering, asset inspection, early engagement and advisory, design and engineering, construction and delivery and asset maintenance, which is the core element of the group. It's very much a full end-to-end asset life cycle, self-perform capability and experience, very much an early contractor engagement model aligned to SRG Global, industry-leading management team with a proven track record and absolute go-to technical specialists with in-house engineering expertise. And you can really overlay that on Slide 7 with the geographic footprint, which really provides a significant competitive advantage and not of a shore base that's very difficult to replicate in Fremantle, Port Hedland, Cape Preston, Onslow, Broome and Gladstone. This gives a massive competitive advantage. And look to bring that to life, Port Hedland is probably a good example where they've got a very strategic geographic position, a complete suite of service offerings, term contracts. They have access to all the moorings in Port Hedland. So it gives them a massive advantage and underpinned by a really quality key client base, government port authorities and blue-chip clients, primarily in the resources and the energy space. And I guess dovetailing into the complementary capability on Slide 8. It's very highly complementary to what we do. And I think to really make it quite simple for people, TAMS is very much an infrastructure play coming from the sea to the shore. SRG Global, very much an infrastructure services partner coming from the land on to the sea. So very complementary in what we do in providing critical services in this particular space. And it's not a foreign area for us as we move to Slide 9. SRG has had a long history in the marine infrastructure space. It is not a foreign sector for us. You can see on Slide 9, the bottom half showcases some of the case studies and skills at SRG Global as in the space, Green Island Jetty, maybe Great Barrier Reef, Swanston Dock, we're doing ongoing Wharf upgrades at the Port of Melbourne, South Trees Wharf remediation, ongoing work in plants with QAL, a long history at Fremantle Port. So it's not a new space for us, but SRG, very much a specialist subelement. What TAMS brings to the table is a complete full end-to-end offering as a market leader in the field. So it really strengthens the overall offering. I guess to bring that to life a little bit more on Slide 10, we've got a case study for asset maintenance. This is the Port Hedland shore base, a really good case study example of long-term relationships, key blue-chip clients under term contracts and a full suite of services, subsea services, inspection, monitoring, diving services, asset maintenance, asset remediation and upgrades and backed by specialist fleet. And I think the key thing is TAMS has a lot of specialist kit that is such as barges and other types of kit. It's really the enabling access assets to access the types of infrastructure they either need to construct or maintain. They also own all the moorings at the Port Hedland shore base as well. So a very complete offering from an asset maintenance perspective. Then dovetailing on the Slide 11, which provides a case study on the engineering construction side of their business. This is Broome floating Wharf. It's recently been completed. There's been a lot of press on this, both in the news and in media. It's pretty much the first of its kind of an infrastructure of this size in Australia. It's very much a state-of-the-art floating wharf infrastructure, particularly in Northern Australia, where there's quite significant tidal shifts. What these types of infrastructure allow is 24/7, 365 day complete access. In Broome, tides moved 10 meters within 6 hours, and this infrastructure really is an absolute game changer for providing complete access to Broome. Well, TAMS basically did the entire job from early contract engagement, design, engineering and self-performing construction with the ongoing maintenance opportunity. There are significant opportunities beyond this in Australia moving forward. But what it really does is showcase the absolute technical and engineering skills that TAMS has as a group as an absolute go-to player in this particular space. I'd encourage you for those that really want to understand this a bit more, jump on the KMSB website. There's some terrific videos that really highlight what this -- how this infrastructure has been built and sort of the game-changing logistics it opens up for Australia and Broome in particular. So we've been through, I guess, the deal structure itself, the strategic imperative of why we did this, the skills of TAMS, the geographic footprint, the capability, some case studies of what they do. We'll now move on to some of the key end markets for TAMS. And you think about SRG on Slide 13, as a diversified infrastructure business across a broad range of sectors, as we move to TAMS offering on Slide 14, the key sector opportunities, clearly, ports and marine is the one world of TAMS. But in reality, it cuts across a broad range of sectors from water, energy, resources, transport with defense being an absolute area of opportunity that TAMS doesn't play in today. It's very much part of our strategic rationale of doing this deal, and I'll sort of touch on that a little bit more further on in the presentation, but it operates in sectors that we are in and know well today and it will open up further broader opportunities. Moving on to Slide 15. I realized when we're talking about marine infrastructure, it is critical sovereign infrastructure. It's the lifeblood of Australia's trade economy. The reality is marine infrastructure is capital intensive. It's aging infrastructure. It's obviously in very corrosive environments. Australia is the largest island in the world. So the need for sort of construction, upgrading and maintaining, it is an absolute area that's critical to Australia. And I think that's a great segue into Slide 16 is the increased demand on port infrastructure. The reality is we've been through a multi-decade expansion from a production and throughput perspective on marine infrastructure, particularly in the resources and the energy space. And what that does it increases the demand for upgrading, expansion, but also most importantly, that ongoing maintenance and the increased maintenance spend as we move into the future. That's probably, I guess, more the maintenance side as we look at sort of more the engineering and construction side on Slide 17, there is a massive pipeline of opportunities as we move into the next 10 to 20 years. I've put some examples on the right-hand side there of some near-term opportunities. Westport, Kwinana has been well in the press, Port of Townsville, a lot of upgrade work in the Pilbara region. A good example, Step in the West, which is the backyard for TAMS of sort of port construction and what's coming up in the next 5 years in terms of a 28.7% compounding annual growth rate. There's a lot of investment coming up in resources and energy. But probably most importantly, the investment is both private but also public. And there's a lot of government investment, particularly coming up in marine infrastructure in defense, a lot of press around AUKUS and other investment that's taking on -- that's happening in this particular space. That's a multi-decade investment as we move into the future. As we look at Slide 18, the long-term investment in defense is an absolute opportunity and an area that TAMS doesn't play in today whereas SRG has a footprint in the defense space, particularly here in the West at Garden Island and Henderson. And through this acquisition and coming together, it will open up more opportunities for what's to come in defense. In the next 10 years, the government is going to spend $3.5 billion to $30 billion in the Integrated Investment Program. The reality is 38% of that is in the maritime space. And what this opens up the door through this acquisition is combining with SRG Global, the broader capability to play our role of what's going to be a multi-decade level of investment as we move into the future. And you can clearly see as a combined group that self-perform engineering capability and the key points of difference that we have is an area that's in the backyard of TAMS. So we'll move on from the key end markets more into the pro forma financials, move forward to Slide 20. As I touched on earlier in the presentation, revenues of circa $1.65 billion as a group, EBITDA of $175 million and EBIT of $135 million. Important, and that's a pro forma of 12-month assessment, not the 8-month contribution that TAMS will have in '25. How does that make us look as a business on Slide 21. We can see the base business organically growing to $140 million in FY '26 and then the uplift of 25% of TAMS on a full 12-month basis takes us to $175 million. That's a 25% increase, EBIT increase of 30% from $105 million to $135 million. You can see what were already industry-leading margins at 9.7% EBITDA moving 90 basis points to 10.6%, EBIT margins moving 100 basis points from 7.2% to 8.2%. Now from an EPS perspective, on Slide 23, it's a circa 25% EPS accretive deal from 11.1% to 13.9% gearing moving from a net debt -- net cash position to net debt to EBITDA of 0.3x net debt to EBITDA, so very modestly geared work in hand moving above the $4 billion mark, opportunity pipeline moving above $11 billion. So clearly, a really good, I guess, set of metrics and set of numbers for SRG Global as we move into the future. Slide 23, I really want to touch on the deal metrics and scenario analysis. And really, it's pretty important to understand that our assessment is the green box. Our assessment of how we value the TAMS business and what we expect it to deliver is really on a base case recurring sustainable maintenance style earnings for the group of $35 million EBITDA and $30 million EBIT. But you can kind of see the impact of the earn-out should those numbers be hit, it's an EPS accretive deal. But what we've done is really to try and risk weight this deal to make it a win-win business such risk weighted on the downside, but also an absolute win-win on the upside. And the reality is the better the business does, the better it is for the vendors, the better it is for SRG Global and our shareholders. The reality is TAMS has delivered in the last couple of years that sort of far right of that box and beyond, the reality is they've delivered an exceptional piece of infrastructure in Broome, despite being very heavily focused on that. And it's now really kind of looking back to what are the maintainable baseload earnings. But clearly, you can see the opportunity as we move into the future of what this business can be, where it can go and what it can do because we're really valuing this on its baseload maintainable -- sustainable maintenance earnings, which is really the summary of the deal on Slide 24. It's an absolute transformational acquisition of a market-leading specialist in the marine infrastructure services space. It's a very clear strategic fit with complementary self-perform delivery capability, very aligned to the SRG Global model. It gives us instant market leadership in highly attractive growth markets for critical infrastructure services. TAMS comes with a significant competitive advantage with the footprint of critically located store bases, diversifies and enhances our growth opportunities and cross-selling capability across SRG Global. And it's clearly a highly accretive acquisition with a high level of recurring earnings and a capital-light business model with CapEx circa 2% to 3% of revenue. I think the key message for our shareholders today is that we're buying a terrific business with terrific people performing exceptionally well. There's key points of difference in the field that it plays in, terrific growth opportunities, but it's also joining a business that's performing exceptionally well. I think our average EPS growth in the last 4 years has been more than 50%. The business -- the core base business is exceptionally strong, and we're joining together two terrific businesses. So I again want to really welcome the TAMS people to SRG Global. I know you'll be on this call, really looking forward to meeting you in person when we officially come together on the 1st of November. It's exciting times ahead for the business. It's exciting times ahead for our shareholders. I'm really looking forward to taking this business forward and continuing to build the business that we know we can be.

Terrific. Thank you, David. It's Roger Lee here. I'll run through the questions that have been put on to the platform and invite anyone else to put more questions as they wish. So question number one, David, given the embedded nature of TAMS with blue-chip customers, does this present a high barrier for entrants?

I think as you think through the presentation itself, and thanks, Joseph, for asking that question. I mean, TAMS has got long-term relationships. Clearly, their delivery capability is absolutely exceptional. They're absolute specialists in their space. And you overlay that with a key competitive advantage with the strategic shore bases that they have that there are very high barriers to entry. There are a few that play in this field. And I think the enabling assets that they have as well really gives them a key point of difference.

Thank you, David. All right. Next question is that will TAMS' activity growth come from existing relationships? Or are there opportunities to grow from contract awards with new clients?

Look, I think it will be a reality. It will be a bit of both. I mean there's existing relationships and the ability for TAMS to replicate some things they've done, particularly in the engineering and construction space, which we're not really valuing at this point. There's the defense opportunity, which would be a new market for TAMS. There's some geographic opportunities as well. We're over on the East Coast in some areas that TAMS aren't playing in today, but have had some history there in the past. So it's really both ways. And also, I think what it does, it unlocks cross-selling opportunity with other parts of SRG Global's business as well and really makes the competitive advantage of the entire group and that offering very hard to match.

A few more questions later now, so we'll keep going through them. David, did you consider fundraising option from existing shareholders?

Look, I think for us, when you look at the deal itself, the key TAMS shareholders are very keen to take some SRG Global scrip. They very much believe in us and where we're going and where the value of that scrip will go over time. And the reality is with the sort of balance sheet that we have, we're very cash generative. We had a net cash balance sheet. So it would have made no sense to do a raising that would be dilutive to shareholders.

Yes. I agree. Are retail investors going to get any shares?

The reality is there's no capital raising for institutional or retail shareholders through this acquisition. It's been funded through debt and issuing a scrip to the vendors.

Right. Where do you see the highest value cross-selling opportunities between TAMS and the existing maintenance and industrial services contracts?

Well, look, I think for us, it's pretty clear here that the sort of marine infrastructure space the offering of TAMS coming together with our sort of land-based skills coming up for the shore that going to market with a very complete offering will be quite different to what others can do. The defense elements are clearly a key market that we want to tackle over the medium term. Over on the East Coast, there were some pretty significant opportunities to sort of overlay TAMS sort of skills in the space along with SRG Global's capability. And there are some areas on the East Coast today that we subcontract, particularly in difficult to access structures for bridges and the like, where you've got access from them. There will be some stuff that we've historically subcontract that we can now target as a combined group.

Terrific. Thank you. Any guidance on expected cost of revenue synergies and the time frame over which they will be realized?

Well, I think this is not really a cost synergy play. The reality is the job everyone has today, the job that they will have tomorrow. There's no real cost benefits here. There may be some property elements, but very, very marginal. And I think that would be exceptionally small. Look, from a revenue perspective, the reality is we've provided some clear numbers in terms of our base case and what we want the business to deliver on a 12-month basis. My very key focus on any acquisition is focusing on the cultural integration in the first 6 to 12 months. TAMS is a terrific business, well led by Lee and the team. The reality is it has delivered well north of the sort of baseline scenario we've outlined in the past. And the view is that there's some clear win-win options if the business over delivers, and we'll see how it grows over time. But the growth opportunities over the next 5, 10, 15, 20 years are significant.

Agreed. Margins. How defensive are the margins? And how have margins tracked over the last couple of years?

I think the margins are very consistent over time. I mean it's a very specialist field and with that self-perform capability. So the margins are very consistent with history, and that's what we would expect moving into the future.

Terrific. Thank you. Shore bases, how important are these for winning work? And how does the footprint compare with competitors?

Well, I think it just gives you a natural geographic competitive advantage. So it's a huge barrier to entry. And I think when you -- it's a question of actually we discussed with TAMS management in the past, who are the key competitors sort of talked in the past around a lot of offices in this world that really don't have this sort of shore-based capability or the specialist end-to-end marine infrastructure delivery capability that TAMS has. So I mean the shore base is one key competitive advantage, but certainly not the only one. It's the in-house expertise, the absolute end-to-end full suite of offerings. There's really not many players like it in Australia.

Terrific. Thank you. Few questions here now on how quickly do you think you might open up defense for TAMs from a practical point of view in Darwin, et cetera, and Henderson?

Look, I think there's clearly a lot of investment coming up. I take a very long-term lens on this. And one thing I'm a massive believer on not just in business life and particularly in business in this situation. It's about giving yourself the opportunity, being ready, having a point of difference. And clearly, we're playing in defense today. This will open up more opportunity with some competitive advantages that we're adding through this acquisition. So look, we'll see it play out. A lot of that investment is sort of coming up '27, '28 and beyond, and it's about being positioned and ready when the spend comes.

Yes. Terrific. Couple of questions. It's been bought very well. A bit of color on how the deal came about.

There's a sole source discussion that we've sort of been in dialogue since the start of this calendar year. And I think Grant, the founder has done an amazing job. He's an exceptional business over the last 25 years. Grant, really honoring the legacy of his business, having a good home for his people. It was pretty much agreed early on that we're a natural fit with each other. And we're really trying to structure a deal that is a real win-win into the future that there will be some wins for the vendors in terms of where our scrip goes, but also some opportunity to do well. And clearly, you can see from an SRG Global perspective, it's a good outcome for our shareholders. And we want to make sure everyone feels good about the deal and it's a win-win and a motivated to keep driving moving forward.

Very good. I'm going to try to group a few questions together because there are some common thematics here. So there's obviously the sustainable earnings as a base case. How does the construction pipeline look like in terms of TAMS going forward?

Look, there's a lot of -- there's a significant pipeline of engineering construction opportunities in front of us over the next 3 to 5 years. The reality is the business has been very focused on delivering the Broome floating fighting wharf well. That's pretty much concluded in the last 4 to 6 weeks. So they're focused on delivering that and then looking at what's next. And there's a good pipeline there. The really the assessment we're making is more that sustainable maintenance recurring earnings at this point in time for '26, and then it's more about we'll work on what comes beyond that.

Question on margins, very strong in that sort of recurring earnings environment. Can you speak to that a little bit around what's the point of difference and how does it achieve those margins?

Well, it's a pretty similar model for SRG Global in terms of that really early contractor engagement, getting in early, doing that sort of whole value engineering piece and adding value to the client and then having the ability to execute the deal and then even maintain ongoing. And that's something that we know is very valued within the SRG Global business and our sort of offering to market. And TAMS is that absolute player in terms of the most sought after in what is quite a specialized space.

The next couple of covered offering the deal origins and process. Dividends going forward. What's our view on dividends going forward given this acquisition? Will this accelerate dividend growth?

Look, I think today, I've just finished a full year results a couple of months ago, you can really see from dividends have continued to grow over the journey. Really to me, the focus today is talking about a really good deal, and I'll get to the assessment of dividends as we get into the half year. But clearly, we've got a track record of growing the business well, but also increasing the dividend as well, and I would expect that trend to continue.

I'm going to group these couple together as well. So in terms of TAMS' historical performance, any comment around TAMS historical earnings and cash conversions?

Yes. So cash conversion really strong, but also from an earnings, there really is the TAMS business in the last couple of years has delivered of sort of the base case scenario that we've talked about. And for us, we're really basing this on a baseline of earnings and particularly the Broome infrastructure being coming off delivery sits back to kind of the more core maintenance element and then looking for what the next engineering construction opportunity is, but a really good track record of delivering the numbers for the base case and beyond.

Specifics around the actual technical specialist area. So can you please unpack the marine specialties that TAMS has for SRG?

Well, I think it's just -- it's a complete end-to-end service offering in the marine infrastructure space, everything from upfront asset monitoring inspection, diving services, early engagement advisory, engineering, design, construction and then full maintenance suite. So it's a full complete offering in the marine infrastructure space. The reality is SRG's expertise in marine infrastructure is more probably a few specialist sub elements such as cathodic protection and carbon fiber strengthening and remediation.

Yes. And just adding to that, too, David, I think how you mentioned that SRG is from the land to the sea from the sea to the shore. I think being offering a complete offering in that perspective where you can package up the whole offering from both sides is a pretty significant differentiator we feel. The next question around, can you give us a flavor of the ownership structure for the whole business? You mentioned there was a majority shareholder that's not involved in the business for a period of time. And how is the allocation of cash to the scrip between founders and other shareholders?

Yes. So I mean, look, it's not my story to tell in terms of the individual shareholders. Really the founder was around that 80% mark of the shareholding for the group. He's been on the day-to-day running of the business for some time, been intimately involved in the discussion since the start of the year. Our key management were traded a little bit differently in terms of half their equity was in cash, half was in scrip to sort of give them some more alignment and opportunity from a scrip perspective. So I think it's a -- I think there are 12 sort of shareholders in total, the founder in 80%, key management a reasonable chunk of the rest and then some sort of smaller minority shareholders as well. And all key management are moving with the deal to incentivize as part of this.

Yes. I think we covered some of the topics already. Who are the main contenders that comes up within contracts? Talk to us a bit more about the customer base that it has.

I think it's interesting sort of talk anyway around some of the competition. They look at the likes of as well sort of their key competitors that sort of infrastructure services maintenance space, probably set themselves as having a really good point of other players such as and the like that are kind of probably a little bit more generous, but compete in this space, but probably a little bit similar to us. So a lot of the players they compete with more subcontract. What they do is TAMS is very much aligned with our model of that full self-perform in-house skill base.

Terrific. Any difference in TAMS' working capital requirements or warranty requirements compared to SRG's business? Look, the reality is that TAMS runs a very healthy working capital structure and they manage the business extremely well from a cash perspective. Warranty requirements is no different from SRG's business. So from a business perspective, very similar SRGs, which is fine. And the last one here around FY '26, what's in construction and does this maintenance recurring and earnings?

The reality is the pro forma '26 is really more maintenance and services perspective, less engineering and construction.

All right. Terrific.

I appreciate everyone ringing into the call. I think it's an exciting day for the business and really looking forward to TAMS joining on the 1st of November. And the overall company is in a really strong position. We keep building the foundation of this business, and we're very determined to keep delivering for our shareholders and keep building a great business. So thank you for ringing in.