10/12/2024

(see also my straw “$43 million contract” for more details)

The Ceres Urea Plant contract provides a solid footing for Acrow to achieve double-digit earnings growth over the next 3 years. Prior to this announcement analysts were forecasting FY2025 earnings of $0.11 per share, up 22% on last year (Consensus of 3 analyst, Simply Wall Street).

At $1.09 per share Acrow is trading on a PE multiple of 12 times FY2024 earnings. Based on analyst FY2025 consensus Acrow shares could be worth $1.30 next year (11cps x PE 12).

Using McNiven’s formula and assuming future ROE of 22%, and requiring a 13% per year return, I get a valuation of $1.25. Analysts are also forecasting Acrow to pay a 5.5% fully franked dividend in FY2025 (7.9% gross yield).

I think you could buy Acrow between $1.00 and $1.10 per share and still do quite well. We already have a reasonable weighting of Acrow, so it’s probably a HOLD for us at the current share price.

Held IRL (3.2%), SM (4.7%)

30/08/2024

I might have been a bit too enthusiastic when I wrote my “Bull Case” straw for Acrow a few weeks ago. At that time shares were trading at $1.05 per share and I thought that was a bargain price. I probably should have waited for the result. It’s probably still a hesitant but at $1.05 per share, but I’ll go into the valuation later.

Annoyances

Acrow performed well, however shareholder dilution due to capital raising through institutions for its latest acquisitions are starting to have an impact on the private investor. The share count increased by 35.1m to 301.4m, an increase of 13.2% on the prior year. This was primarily due to the following:

• In November 2023, Acrow acquired MI Scaffolding. The acquisition was partly funded by a $15m capital raise, resulting in the issuance of 18.8m new shares;
• In March 2024, Acrow issued 1.8m new shares to the vendors of Benchmark Scaffolding as part payment for the acquisition;
• Acrow issued a total of 8.1m new shares as part of the dividend reinvestment plans (DRP) in November 2023 and May 2024, including a DRP shortfall underwrite of 6.6m new shares in May 2024, to assist in funding short and mid-term growth opportunities; and
• The balance of approximately 6.4m new shares came from the conversion of performance rights.

Private investors didn’t have the opportunity to partake in the capital raises and the distribution of NPAT per share has been diluted by 13.2% over the year.

On top of that the higher interest rates and increasing debt has weighed down on basic EPS. The net debt on equity is now 48.7% which is higher than I’d like to see it. While it’s nice to see a big fat dividend grossing over 9% (including franking credits at the current share price of $0.94), you’d have to question why management isn’t reducing debt instead of paying dividends, especially given the high ROCE and ROE the business is maintaining.

The other thing that irks me is when profitable businesses don’t include statutory NPAT and basic EPS in their headlines. It’s like they are trying to hide something. Investors want to know this stuff! To find these figures you need to look in Appendix 4E.

One more annoyance before moving onto the positives for the business is the reported ROE. I don’t know how they work it out but it’s not the standard Morningstar or Commsec use. The Commsec financials calculate ROE% as NPAT on Shareholder equity at the end of the financial year (not the start which I suspect Acrow is doing). And what the f@#k does this mean “Return on Equity (ROE) decreased by 6 ppts to 27.1%, due predominantly to the higher effective tax rate. On a like-for-like tax basis, ROE increased from 25.0%.” Are they trying to say “our ROE would have been higher if we didn’t have to pay so much tax????” So would every other company listed on the ASX!

Looking at ROE, the best I could come up with using underlying EPS was 25% (11.5 cps / 47 cps X 100). If you used statutory EPS the ROE would have been 19% (9 cps / 47 cps X 100).

Now I’ve got all that off my chest, I’ll move on to the positives for the business, and why I still like it.

Result Highlights (Appendix 4E)

10/07/2024

See also Record FY24 Sales Pipeline for more detailed justification

Using McNiven’s formula assuming equity of 43 cps, ROE of 28%, 42% of earnings reinvested into growth, and a 5% fully franked dividend, and a required annual return of 15% I get a valuation of $1.40 per share. That makes the current share price of $1.06 look cheap. According to McNiven’s formula Acrow could return investors paying the current share price more than 17% per year over the next few years.

Looking at a PE valuation, Acrow is currently trading on 11.9 x FY23 earnings, 11 x forecast FY24 earnings, 9.6 x forecast FY25 earnings, and 8.7 x forecast FY26 earnings. This is probably in line with historical PE valuations. However, I’m surprised there hasn’t been a PE re-rate for this business given this will be the third consecutive year where Acrow has returned more than 20% on shareholder equity. While the share price has done very well, I think the business is still undervalued..

What do the analyst think? Looking at Simply Wall Street data the 1 year target price is $1.35 (3 analysts).

David Lane from Ord Minnett said on The Call today (10/07/2024) that their analyst has an accumulate recommendation on Acrow. Their target price is $1.25.

As a valuation I’m going with Ord Minett’s price target of $1.25 since it’s the lowest of the three valuations discussed above. To walk my talk I added a parcel of shares to our Superfund at $1.06 yesterday. I think I’ll wait until the FY24 results before adding anymore.

Held IRL (2.6%), SM (4.9%)

10/01/24

It’s been 11 months since I last valued Acrow and since then the share price has continued to trend upwards from my previous valuation of 95 cps. Today it is trading at an all time high of $1.07. This has been one of my best performing stocks (share price wise) in IRL with the share price more than doubling in 2.5 years. Now I’m wondering if the share price has run to hard, and should I take some profits?

The average PE ratio over the last 6 yrs was approx 12x, and it is currently trading on roughly 12 x FY23 earnings, and close to 11x forecast FY24 earnings (10 cps). From a PE perspective the share price looks reasonable.

If I use McNiven’s formula which estimates future owners returns by considering forecast normalised ROE as the rate of internal return (IRR), percentage of reinvested earnings, the current equity value, and dividends paid to shareholders (including franking credits), I get a forward annual return to shareholders of 13.5% on a current value of $1.07, providing the current ROE of c. 23% can be maintained into the future.

I think the quality of this business has significantly improved over the last 6 years with the ROE at an all time high of 23.9%, up from 20.9% in FY22 and a vast improvement on 8.2% in FY21.

This has largely been due to smart capital allocation by management. Over the past 3 years management has been focused on incrementally improving the return on invested capital with a minimum hurdle rate of 40% for new capital allocation. Up until the most recent acquisition this minimum of 40% was always mentioned, however for the last acquisition there was no mention of it. In addition, the CEO (Steve Bolland) sold a large portion of his shares into a capital raise directed to institutional investors. This unnerved me a bit and I lighted off some shares IRL at $1.04. I also had some concerns when the federal government cancelled a number of infrastructure projects around the country following cost blowouts on several projects that were already underway. However this hasn’t dampened the enthusiasm of the market as Acrow’s share price continues its upward trend.

I guess the future growth of Acrow will depend on the health of the Australian construction industry going forward and Acrow’s ability to secure more contracts and continue to grow revenue. The quality of the business itself has definitely improved and I expect ROE to remain between 20% and 23% for at least FY24. I am expecting normalised earnings for FY24 to be c.10cps and at a conservative forward PE ratio of 11x I get a current valuation of $1.10.

So until the next earnings update I think Acrow is a hold.

Held IRL and SM

26/02/23

See my straw 1H23 Results, Lifts guidance for justification.

My valuation using McNiven’s StockVal formula assuming normalised ROE of 26%, dividend payout ratio of 43% (historical), franking at 85%, and a required return on your investment of 15%, I get a valuation of 90 cps. If you were happy with a 12% required return on your investment you could pay up to $1.30 per share providing Acrow’s ROE remains at 26% or above. Given the strong pipeline of work and the ACFs disciplined approach to new capital expenditure (minimum 40% return on invested capital), I am going for slightly above my lower valuation at 95 cps.

Copied below are the results commentary from FNArena - Price Target 92cps

“While first half results for Acrow Formwork and Construction Services were in line with Morgans forecasts, management upgraded FY23 guidance on a strong outlook. Ord Minnett saw a "solid" result, with both sales and gross profit exceeding the broker's estimates. The first half earnings margin rose by 500bps to 29.1% due to an improved revenue mix towards equipment hire, notes Morgans. Pleasingly, growth is largely organic and most states and segments contributed. As management has lifted guidance, Ord Minnett lauds the positive momentum carrying the business. The broker believes outperformance is carried by the Formwork division.”

Disc: Held IRL (2%), SM (4.3%)

25/08/2022

Acrow has just announced an exceptional FY22 result, and has provided FY23 EBITDA guidance of $43m to $44m up 20% (ie. midpoint, $43.5m).

FY23 underlying EPS should be circa 8.6cps based on the forecast 20% increase on FY22 7.2cps EPS.

The industry average PE ratio is 16.4 according to Simply Wall Street data. If we assume a PE of 13 (similar to the current PE for ACF based on 12 months of trailing data previously available to shareholders), we would arrive at a simple discounted PE based valuation for FY23 of:

V = 13 x 8.6 = $1.12

and discounted back by 10% to the current valuation:

= $1.12 x 10/11 = $102, say $1.00

Alternatively using McNivens StockVal Formula:

V = (APC/RR xRI + D)/RR x E

and substituting the following variables:

APC = 19% (FY22 ROE is 19%, and FY Earnings growth forecast is 20%)

E = 33cps (FY22 equity per share)

RI = 62% x APC (based on portion of earnings retained in FY22)

D = 38% of APC x 40%/0.7 (based on portion of earnings paid as dividends in FY 22 and franked at 40%)

RR = 10% (my required rate of return).

This gives us a StockVal = $1.02, say $1.00 (suspiciously the same as my quick PE based calculation) :)

28 April 2022:

Since my previous valuation on 4/3/22, Acrow Group has upgraded FY22 guidance as it continues to leverage off strong Australian construction markets, especially in the Civil Infrastructure sector (summary below).

The mid-point of underlying earnings guidance for FY22 is 6.7cps. ACF shares are trading at 51.5cps today after going ex-dividend yesterday (1.2cps partly franked) which is a FY22 PE multiple of 7.8.

I don’t think this is demanding for a business that has been growing earnings by 18% per year over the last 5 years and is forecast to grow earnings by 20% per year going forward (2 S&P Global analysts, SWS data). The average PE for this sector is 11.4 (SWS).

Commsec analysts are slightly more bullish forecasting FY24 earnings to be 8.1cps.

(Source: Commsec)

ROE has been improving and is forecast to be circa 20% going forward. This is being leveraged by some debt, currently sitting at 39% debt on equity. I think Acrow are making good use of debt to grow the business faster than what would otherwise be achieved. It makes sense with the increasing government spend on infrastructure and projects in the pipeline.

Margins are OK, Gross margin 63% and net profit margin 8.2%.

On 9 March CEO Steve Boland made on market purchases of 127,021 shares at 52cps, totalling $65358.

There is an interesting presentation by CEO Steve Boland with Mark Tobin on CoffeeMicrocaps, recorded on 3 March 2022 https://www.acrow.com.au/presentations-interviews/

Valuation:

Using the average industry PE of 11.4, FY24 earnings of 8.1cps and discounting at 10% per year,

V = 11.4 x 8.1 x .8 = 74cps (I used a PE of 15 in my previous valuation on 4/3/22 which explains the lower valuation).

This valuation does not include future dividends, likely to increase from 4% to 6% partly franked over 2 years.

Using the StockVal formula, and buying Acrow at the current share price of 51.5cps should provide a total return of circa 14% per year going forward.

StockVal = (APC/RR x RI + D)/RR x E (McNiven, 2006)

StockVal = (20/14 x 0.4 x 20 + 0.6 x 20)/14 x 30c = 50.2cps

if you were happy with a 10% return per year from your investment, you could pay 84cps for ACF (substitute 10 where you see 14 above).

This link helps to explain this formula and how it works https://www.make-money-stock-value-investing.com/calculating-fair-value.html

Disc: Accumulating IRL, Held in SM

4 March 2022:

Acrow Group has performed strongly for the 6 months to 31 December 2021 - 1H22 Report

The business has continued to capitalise on its long-term strategy including its pivot towards the value added, highly engineered civil formwork solutions market as well as continued focus on equipment sales and expanding its new Industrial Services division.

On an underlying basis, the key highlights for the year included:

• Group revenue up 38% on prior comparable period (pcp) to $69.3m, attributable to a strong trading performance across all divisions, led by the Industrial Services, up 158%. Notably performance was all organically generated Sales contribution of $37.6m, up 30%, driven primarily by growth in the Formwork hire business
• Underlying EBITDA of $16.7m, up 51%, and EBITDA margin of 24.1%, up 2.1% pts
• Underlying NPAT up 118% to $8.0m.
• Statutory NPAT up 294% to $7.4m, assisted by a decline in significant items and share-based payments, down 63% to $667k.
• Underlying EPS up 94% to 3.28 cents per share
• Net gearing of 27.3%3, up 0.6% pts on 30 June 21 levels.
• Operating Cash Profit (defined as EBITDA less cash leases expenses, maintenance capital expenditure and tax paid) of $10.2m, up 84%.

1H22 Interim Results (unaudited, 9/2/22).

ROE for the half was up 2.8% points to 19.2%.

Guidance (as at 9 Feb 2023)

Acrow upgraded guidance for FY22 to 6.2 - 6.5 cps (up 59%).

Valuation:

Using a PE of 15 (the average annual PE for 2020/2021 was 15.65, Source: CommSec), assuming FY22 EPS of 6.2cps, and discounting at 10%:

V = 15 x 6.2 x 0.9 = 83.7 cents, say 83 cents.

Disc: shares held

July 2021:

ACF CEO Steven Boland is confident earnings will increase by over 20% in FY2022. All divisions are performing extremely well this year: 1. Natform screens recorded a 61% increase over the prior year, achieving growth across all three states. Notably, the Queensland business reported a circa. 150% increase, with growth accelerating into the second half of the year. 2. Industrial Services (formerly Industrial Scaffold) reported 54% growth, following a successful push into New South Wales, South Australia, and Tasmania and a concerted effort to enter new market segments. 3. Formwork division (excluding Natform) secured new hire contracts grew by 18% year on year. Growth was achieved across all states, with the New South Wales business being the standout performer, up 57%. Consensus of 3 analysts has ACF earnings growth at 40% per year over the next 3 years, and future ROE of 18.3% (Simply Wall Street). FY2023 earnings (3 analysts) are forecast to be $13.4 million. Assuming Share value = E/share X PE Value (2023) = $13.4 million/222 million shares X 15^ = $0.90 (^I have used a PE of 15 for the valuation. I think this is reasonable given forecast growth of 40% and forecast ROE of 18.3%. ACF has a Debt/Equity ratio of 35%). Valuation (discounted at 10% per year) = $0.90 X 0.8 = $0.72 Simply Wall Street DCF valuation = $1.34 Using the lower valuation of $0.72 Disc: Hold shares