Brokers' take: UOBKH initiates Civmec at 'buy' with S$0.98 target price

UOB Kay Hian (UOBKH) believes the market had overlooked Civmec's defence business potential, as it forecasts record earnings for the company backed by a A$1 billion (S$1 billion) order book.

In an initiation report on Tuesday (Oct 19), the research house commenced coverage on Civmec with a "buy" call and a target price of S$0.98, or 18 times its estimated earnings for FY22 - a multiple that UOBKH said is in line with its peers.

Civmec's Singapore Exchange-listed shares traded lower, down 0.7 per cent or S$0.005 at S$0.72 as at 10.06 am. It is also listed on the Australian Securities Exchange.

UOBKH expects the integrated multi-disciplined construction and engineering services provider to deliver record earnings in FY22 of A$41 million, up 18 per cent compared to a year ago. All 3 business segments - resources, energy and defence - recorded growth of 65 per cent, 205 per cent and 51 per cent respectively for FY21.

Analyst John Cheong said favourable prices of oil, metals and minerals will continue to drive construction demand and the ramp-up of the defence business could see Civmec's earnings growth accelerate.

In particular, the defence business has been underappreciated, even as Civmec amd Lunrssen Shipyard has secured a A$3 billion contract to construct 12 ocean patrol vessels for the Australian Navy by 2029. With Civmec's Henderson heavy engineering facility in Australia, Cheong believes that it was key to winning this contract.

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"The defence sector has high barriers to entry with only 2 players approved for shipbuilding, with the other being Australian Submarine Corp. The defence business should also boost net margin," he opined.

As Australia's resource and energy exports are expected to hit record levels, this is likely to have a positive impact on Civmec, as the Australia mineral sector improves with increasing demand.

On the defence front, the engineering services provider is looking to secure more shipbuilding contracts, with the Australian Navy's budgeted A$89 billion continuous shipbuilding contract.

"We note that Civmec's net margin started improving in FY21, where its FY21 net margin of 5.2 per cent was notably higher than its FY20 net margin of 4.5 per cent," said Cheong.

It's not all rosy for Civmec, it does run the risk of project costs overruns, being unable to secure new contracts, unexpected cuts in spending for the mining and oil and gas sectors and delay or premature termination of projects.

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• Civmec secures contracts worth A$140 million
• Civmec bags multiple contracts worth A$175 million