SRG Global Limited (SRG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SRG Global FY '21 Market Update. [Operator Instructions] I would now like to hand the conference over to Mr. David Macgeorge, Managing Director. Please go ahead.

Thanks, Harmony, and certainly welcome everyone to the call this morning. I thought it was a good opportunity just to provide an update on the SRG business and an early view of what FY '21 has ended up being and also some, I guess, some commentary on the broader market and sort of how FY '22 is shaping up for us. I've normally got my partner in crime here with me, Roger Lee, our CFO, but Roger has taken a well-earned holiday this week. So I've got Judson Lorkin, our Group Financial Controller, here supporting me this morning. I think Roger might have actually rung in for the call, so I hope you're enjoying your break, Roger. There's plenty to come back to. As Harmony mentioned, there is the opportunity to ask questions. It's only a very short presentation so I would certainly welcome any questions. But can we please restrict them to work-related questions? As many of you would know, I'm a mad Richmond supporter. And I've -- my phone has been overloaded with text messages over the last 4 or 5 days since we lost to the Gold Coast. So please no football questions today. I always like to start with a bit about us. So if we move to Slide 2, very much for our newer investors and people newer to the story, who we are, where we're in. We're a global engineering-led specialist asset services, mining services and construction group with a quite diverse services business. Our operating model's end-to-end solutions across the entire asset life cycle of engineer, construct and sustain. And what we want to be, our vision, is the most sought-after in what we do. Others might say market leader, #1. Now for us, at SRG, it's been the most sought-after in what we do. If we move to Slide 3, which is really just the highlights and summary of FY '21 and our performance. But before I go through some of the detail, I just want to acknowledge the team and the business and our people at SRG. They have really stepped up in the last 12 months in a fairly challenging operating environment. And I'm very proud of the way our business has stepped up. The culture is exceptionally strong. And people have really lived and breathed their values and what we stand for, which is live for the challenge, smarter together, never give up and have each other's backs. And I can categorically tell you in the last 12 months, all 2,300 people at SRG have really embodied what we stand for as a company, and I'm immensely proud to be a part of this business. And that's translated into what's been a very good year in performance for us at SRG. We're expecting our FY '21 EBITDA to be the top end of previously provided guidance of $45 million to $47 million. And that's off the back of a really good performance across the board. And what's particularly pleasing is the strong run rate in the second half. If you recall, in our first half EBITDA, it was about $20.5 million. It was quite a step-up in run rate in the second half. And pleasingly, we're delivering at the top end of that range, which I think all bodes well for FY '22 as well, which I'll talk to a bit further on in the presentation. I think most pleasingly for me is cash. We have really strong operating cash flow in FY '21. Our EBITDA to cash conversion for the year was about 130%, which is very pleasing. And this is despite making a significant investment in growth in this particular financial year, growth from an equipment capital perspective, but also from a working capital perspective with a number of the contracts that we've secured this year. Cash has been a really strong focus for the business. And I think I said at the half, it's probably been one of the benefits of the early phases of COVID-19 in terms of really, I guess, allowing us to focus the business on the importance of cash. And that really has translated to a really strong performance. We've moved from a net debt of $8.4 million this time last year to net cash of $12.2 million, which is a fantastic achievement for the business. We've got our balance sheet into a really strong position, and that's one that really places us well for the future. There's been a lot of commentary around margins and labor and COVID in the broader market. And from an SRG perspective, really good strong margin performance with an increase in overall margins in the second half. If you recall, the first half, a really good margin performance in asset services, really strong margin performance in the mining services and a softer margin performance in construction that we forecast would increase in the second half, and we've really seen that translate through in the second half. I won't go into any more specifics and that will lead back to the full year results, which occur at the end of August once we get through our order process, but really strong margin performance across the board. I think we've got a chance to optimize that even further as we move into the new financial year. I think it's something that generally when you start new contracts, you're generally not performing at your optimum in the first 12 months, and that's something we see opportunity to improve that margin further in the next phase along with sort of ad hoc work that will translate through for us with these contracts that we've picked up. What I think it really shows is we're not -- we haven't been buying work. It was certainly a question that I've been asked over the last 12 months with the amount of work that we've won, particularly the term contract work. And clearly, the strong margin performance proves that we're not buying work at 3 points a difference for us. I think pleasingly, the start-up and execution has been terrific through this phase, which is a terrific achievement by our people in the business. Labor has been a really, I guess, a big topic particularly in some of the services and contracting sectors on which we play. We've had minimal impact from labor and COVID-19 challenges in FY '21. And it's not to say it hasn't been a challenging environment in pockets of our business, but for SRG, very much a specialist business, and it's a specialist nature of the business that's really allowing us to, I guess, attract a different type of work from an engineering and a skilled labor perspective. And because it's quite specialized, you're not so much in that broader mass pool of labor that perhaps some other companies are dealing with. It's also the diversity of the business and the service offering. We're a very diverse business. We're not sort of weighted into any one particular type of discipline. And that diversity, I always talk about giving us a very broad platform on which to play, but also it's very much a natural hedge as different industries cycle. And that's certainly that diversity of service offering is giving us protection along with diversity of sectors. We play across a broad range of sectors. A range of some of the -- water, transport, mining, renewables, oil and gas, chemical, steel, defense, dairy. They're just some of the broad sectors on which we play in. And I think the other key piece is our geographic spread. We're well spread out across Australia, well spread out across New Zealand. We've got a smattering of other projects internationally at the moment, but we've sort of, I guess, scaled that back at this point in time. But a very well geographically spread business, which gives us that protection. So while certainly in pockets of the business, there's been some challenges around labor. The overarching business has had minimal impact for us, which I think is really -- it really points to the specialist nature of the business, the diversity of what we do and the business model that we have. Work in hand set record levels of $1 billion, which is up 41% on this time last year. And we're very targeted on what we've tried to win in this period. A high level of annuity now in the business with 2/3 of our earnings being annuity in nature, and I think more than 2/3 of our work in hand are annuity in nature as well. And what that makes us is a very predictable business moving forward. We have a $6 billion pipeline of further opportunities. But we're very selective on what we target. And I think that's really the, I guess, strategic shift we've made in this business over the last 3 to 4 years is really transitioning more towards that annuity-style base. So for our sort of more engineering services and construction type business. We get very targeted on the specialist skill sets that we have around the dams, bridges, tanks and repeat clients in the building space, particularly in facades. I did mention -- I had mentioned earlier that from an international perspective and pipeline have really showed trying to win work that will start in calendar year 2021. That's still very much the case. But internationally, it's very much on our radar for calendar '22 and beyond. But I think for us, if you're a pure construction play, you can feel the pressure at times to keep feeding the beast and perhaps flex the risk profile. And I guess the way that we've taken this business and shifted more towards that annuity earnings style company allows us to be very targeted a much lower risk profile for our business that in time will translate to better earnings multiples as well. We are well funded for growth. We've got available funds of $88.2 million plus an undrawn equipment facility of $27.7 million, and we have a very good relationship with the banks, good bonding and bank guarantee capacity in the business. Balance sheet is in very, very good. The lion's share of our debt is basically higher purchase equipment finance debt, which has us in a really strong position to continue to fund the organic growth that we have in front of us. Our long-term strategy is very much on track, and we're well positioned for long-term sustainable growth with significant organic growth opportunities in front of us over the next 3 to 4 years. And I think it has us in a terrific position. We've already called out FY '22. And from our perspective, we see really strong organic opportunities in the business over the next 3 to 4 years to really grow the business significantly year on year on year. FY '22, we expect to be circa 15% higher than the FY '21 EBITDA result. And I think for those who love their maths, if you take the second half run rate and annualize it, you're getting close to that sort of projection for FY '22. 2/3 of our earnings and our annuity in nature, as I've mentioned earlier, it makes us very predictable moving forward, very, I guess, sustainable and predictable in terms of the earnings profile. We are playing a lot of really positive growth sectors. And certainly, there's, I guess, mixed commentary on sort of services companies and contracting companies. And certainly from an SRG perspective, we're playing into very, very positive growth sectors for our business. And we have multiple organic levers to grow this business into the future through the different service offerings that we have. As I mentioned earlier, we have avenues to further optimize our margin as we move forward, as we optimize some of these contracts and win some more of that ad hoc work. We also have opportunity to leverage our overhead. Further, certainly, from my perspective, I think we can add probably a good few hundred million more top line revenue to the company without really adding to that fixed cost overhead that we have. We are a very scalable business. As I mentioned earlier, we are predicting very strong growth over the next 3 to 4 years and have really got ourselves into a terrific position as a company. So I guess they are the key highlights for the year. I will expand on those more in the full year financial results, but a really, really strong performance by the company, and we are very, very well placed for the future. I always like to link back the strategy in terms of the company and where we're headed moving forward. And if we just move to Slide 4, these are our strategic horizons. We've had a very clear strategy in place for a long time. And it's all -- this whole phase has been transitioning the business mix towards that annuity earnings profile of 2/3 annuity, 1/3 project-based. And I think what you can see from a strategic perspective, we are doing everything that we said we would do in terms of our strategy, and we are delivering against it. A lot of companies talk about moving towards annuity-style earnings we're delivering and doing what we said we would do. And in my mind, we're probably ahead of schedule in terms of where I thought we would be at this point in time. We are very much in that growth phase, which is step change growth in recurring asset services, which we're delivering against. It's innovation, selective growth in the mining services business, which is our drill and blast business, and we're certainly from a data technology automation perspective, delivering innovation, particularly with our data analytics system called [ Orbix ], which is driving value, and we'll see selective further growth in this business, which is all production based. Very targeted growth in specialist civil infrastructure construction, particularly in that dam, bridge and tank space and a lot of investment coming up in water infrastructure and transport infrastructure, which we're well placed to capitalize on. And on our building side of the business, specialist services and products with key repeat clients, such as Lendlease and Multiplex and we're seeing clear evidence of that. We will have a time morph into that leadership phase. We will be Zero Harm and an ESG industry leader and a recognized employer of choice. And look, certainly, what we're seeing is that SRG is very much an attractive employment proposition for people. We're attracting really good talent in the business, and that's driving and attracting more good people coming with it. We want to be the key partner of choice in our specialized field, that most sought-after, and we're delivering against that today. We want to deliver consistent and above-market shareholder returns for our shareholders. And in this phase, we'll look at selective acquisitions, either complement our capability or footprint. There's nothing imminent from an M&A perspective. Certainly, we'll be moving into a phase where relevant inorganic opportunities will present themselves that may deliver value for shareholders as well. But as I've said earlier, certainly, our key focus is driving the organic growth and opportunity in the business. And underpinning that will be 2/3 annuity-based earnings as we move into the future. So we have a very clear strategy. We're doing what we said we will do, and we'll continue to drive that business -- our business and our strategic path moving forward. I always like to close with the investment proposition because that's very much why we -- why we're all ringing in on this call. And if you look at the -- what this translates to from an SRG investment proposition, we've got end-to-end asset life cycle capability, a clear point of difference in the field that we play in as being the most sought-after. We play across a lot of diverse market sectors and geographies, giving us that broad platform of opportunity, but also that natural hedge protection as different industries cycle. Our diversity is our strength. A high level of annuity earnings profile that makes us very predictable as we move forward and will, in time, attract more normal multiples for, I guess, a services-based contracting business. We have a very strong growth outlook. Moving forward, we're sort of flagging circa 15% EBITDA growth in FY '22, but we see very strong organic growth over the next 3 to 4 years. We're operating at a highly attractive valuation multiples. I think we're less than 4x EBITDA based on FY '22 outlook, and we're a dividend-paying stock. I think our gross yield is just under 6% at current levels. And what we want to be is a growth stock and a dividend-paying stock, and we think we can balance that well. I guess FY '21 was a really good stepping stone for us. It's another good step forward strategically in where we're taking this company. And we're operating in a really good environment for us. We're very excited about the future. We've got the right people and the right culture to take this business moving forward. And in my mind, we're well on the path to becoming the company that I know we can be. But in our view, we're just getting started. That's enough for me for today. There will be a more, I guess, detailed overview as we get into the -- get through the audit process and report our results, I think starting from the 24th of August. But maybe it's an opportunity to open up to any questions that people may have. So I'll just go and look on the platform there and get a sense of what people are asking.

A question here around near-term wins. Are there any near-term wins expected? And certainly, from our perspective, the key focus in the second half has really been beating down a lot of the new work that we've won. So moving to a much more predictable annuity-based business. The news on -- we're announcing the iron ore contracts over that period. But we certainly do answer near-term wins. They are a very strong possibility for us across all parts of our business. A question here around first half, second half splits. Pretty detailed, pretty early. Look, in reality, we're generally 45%, 55% first half, second half. From our perspective, we probably feel that FY '22 will be a reasonably even year, probably at 45%, 55% or closer to 50-50. You've got early on outlook for FY '22. What gives you the confidence to do that? Look, I think from our perspective, the second half run rate is a pretty good predictor for us in terms of where we're taking the business. And with a high level of annuity earnings now in the group, we felt it was important to, I guess, flag to the market not only our performance for FY '21, but sort of how we're seeing FY '22, and we're certainly very confident on delivering against that outcome. Okay. Guidance mentioned -- sorry, my eyes are going a bit here for me. Would you expect SRG to go back into net debt to fund strong growth? I think it's probably -- I think that's a good question. It's one for us that we've proven through this phase that we can really fund the working capital and the organic growth that's in front of us. And certainly, from my perspective, I like being a net cash business. So probably from an organic perspective, we think we can continue to fund -- generate good cash and fund our growth moving forward. Certainly, inorganically may be a different case. But certainly, our aim is to continue to be a net cash business moving forward. But having said that, if there are the right growth opportunities, certainly, from our perspective, we had good funding capacity. And if we think it makes sense for the business, then we will act accordingly. How much revenue is SRG doing defense and give a little background. Look, from our perspective, I think I just put out announcement fairly recently. We've got our first contract in the defense space, which is part of our specialist building business. It's only a very small contract, but one that we think and have been through the prequalification process. It really opens up opportunities for us to do more in that space. There is a lot of spend coming up in that particular space. Our first piece of work is in partnership with Lendlease, and we've got a very long relationship with them. We think it's certainly a sector that we can do more in. There's been a few [indiscernible] about cladding. Do you see any acceleration of the opportunities here? I get asked about cladding a lot. I mean my perspective, it's certainly -- it's an opportunity at some point. I think there will be sort of pockets of work. I think probably COVID-19 and the -- in the sort of level of state and federal spend through the period, probably pushed the priority of that back. And look, really where our business is going, it's gone. It's more down that sort of annuity term-type work. I mean if it's with a sort of a partner where there's a body of work, we sort of not so interested in kind of one-off jobs we're competing against the masses. So look, I think it's an opportunity. It's not really kind of factored into any of our thinking in terms of our outlook for FY '22. But I certainly see there's a medium-term opportunity. But probably for us, those one-off sort of project-type works are not really where we've transitioned the business to. What's the current rig utilization in regards to fleet? How are you seeing the availability of your kit? So our fleet are operating in the 90s. Everything we're doing, drill and blast its production base. And what we're really seeing is we're growing organically with our key clients. From an availability perspective, because our fit -- our fleet of kit is quite uniform, we're very much able to flex sort of our maintenance CapEx and growth CapEx spend accordingly. So it gives us quite a bit of flexibility in terms of being able to full order replacement kit that we can morph into growth kit if we need to and then sort of, I guess, stretch the machine life of existing fleet where possible. We're not a company that likes to buy equipment and put it on the fence. And we've got a very disciplined approach to capital, but also to the way that we maintain our assets. And we've consistently operated in the 90s from a rig utilization perspective. And certainly, that's our aim to continue. But in rail, we are also ordering new kit. Generally, for maintenance CapEx perspective, it's around about $12 million for the entire company, a big portion of that is for our drill and blast treat side of the business. It's really the only sort of capital-intensive part of the group. And -- but if there's certain growth opportunities, the capital spend will go beyond that for the right opportunities, which we did last year with Northern Star. I've been asked a few questions around dividends and increasing dividends and percentage of dividends moving forward. Clearly, that's something for the Board to determine for the full year. Our half year dividend of $0.01 was double the dividend from the previous half year dividend. So whilst I might provide -- I think our dividend for the second half last year was $0.005. We're $0.01 for the first half this year and I think that's a question for the Board, but we certainly want to be a growth stock, but also a dividend-paying stock. We have no set policy from a dividend perspective, but we generally pay around about that 50% range. We're a little bit higher in the first half, probably because we saw that the back half was going to be particularly strong. So I think, for us, bouncing our growth, our growth investment, but also rewarding shareholders with dividends on the way through is something that we intend to keep doing. And given our gross yields just under 6%, I think we're really delivering against that at this point in time. A few questions around margins, particularly in the construction space. I'm not going to go into actual quantifiable detail around margins on this call. We'll hold back sort of detail for the full year audited results. But as I mentioned earlier, margins are strong and have improved in the second half. I think in the first half, from memory, asset services was just under 12%. Mining service is around about 23% from EBITDA. And construction, I think, was around about 4.5%. What we've seen in the second half is good performance from asset services and mining services and an uplift in the construction services margin performance. Other questions. Sort of question around -- you mentioned M&A. What sort of things are you looking at? I think from our perspective, we're pretty clear on our strategy. We've got very good organic opportunity in front of us. So where things are either complementary, either from a capability or a geographic footprint perspective, we will look at them, probably more so in the asset services space. I've been on record for quite some time saying we like that kind of asset monitoring, asset integrity type space, certainly growing our asset services footprint in greater portion on the East Coast of Australia's -- Australia as a focus. Over time, also may look at things from an international perspective as well. But probably in the short term, it's very much closer to home in the -- in the Australia and New Zealand market. And look, I think from our perspective, a really good organic growth in front of us over the next 3 to 4 years. So we will be -- on the inorganic space, it will be something that we'll have to make a lot of sense, be consistent with strategy and drive a lot of value for our shareholders moving forward. Pretty much I think covers all the questions. I appreciate people for taking the time today. This will go up on our website post this call. And there'll be much more detailed presentation when we get through the orders. And I think we announced on the 24th of August, but I certainly thought it was a great opportunity to provide some insight into the business, how we're tracking and sort of how we're feeling about the new year that we're coming into. So I appreciate people taking the time. Thank you.