13/02/2025

Good work Strawteam for the hard work you have done in picking this one! Shares have done quite well and the share price has just reached a 3 year high! Not a bad bounce up from $1.00 when we were talking about it.

Similar to @mikebrisy I work on a buy, hold sell valuation to inform investment decisions. For me Duratec is a hold at $1.70, where I believe it represents fair value.

Using McNiven’s formula, assuming future ROE of 32.8%, book value $0.24, 54% earnings reinvested and a 2.7% fully franked dividend, I get a valuation of $1.70 at a 10.7% required annual return. I like to buy businesses like Duratec when the valuation indicates >12% return, which is why it’s a hold for me at this price. However, you could still buy this if the analysts forecasts turned out to be ‘on the money’ and you were happy with a 10.7% annual return (total of dividends, franking credits and share value appreciation).

Held IRL 4.3%

28/08/2024

Thanks @mikebrisy for sharing the Duratec FY24 results summary.

Results are inline with analyst expectations. NPAT came in at $21.4 million (8.8 cps) a smidgeon above analyst consensus of $21.27 million (Simply Wall Street). Revenue was a record $555.8 million inline with consensus of $588.1 million.

Net profit margin was 3.9%, lower than last year (4.25%). Net profit for 2H was $9.2 million, 25% down on 1H. The market didn’t know what to make of the announcement and open down 2%, however, at the time of writing it is up 8%. I think this could be due to the market realising that orders have lifted to $405 million up 4.4% this half. I was hoping the order book would be over $400 million. It just made it!

Management is very optimistic about the outlook (see management comments below) and anticipates significant project awards across all market sectors in FY25. The Company’s pipeline of work supports Duratec’s growth objectives, with solid revenue growth anticipated in FY25. Management expects this to drive further growth in FY26 and beyond.

OUTLOOK

“Duratec is well positioned to achieve solid growth in 1H FY25. The Company’s medium-sized project win rate doubled in the second half of FY24, with all projects underway and contributing to first-half FY25 revenue and the majority extending into the second half. The Company is also expanding its delivery of MSA works to both existing and new clients.

Duratec’s strategic approach, including the use of ECI, has consistently delivered optimal outcomes for clients and stakeholders through collaboration and comprehensive solutions. Due to the high levels of tendering and ECI assignments, the Company anticipate significant project awards across all market sectors in FY25.

The Australian Department of Defence (DoD) has released indications of expected works into the future through the latest Defence Strategic Review. Key opportunities include an $8 billion spend at Garden Island Stirling base, where Duratec and DEJV are positioned well to secure opportunities identified in the Company’s tender pipeline.

Further prospects in the Pacific through Australian Government strategic relationships and US Department of Defence spend which aligns with the Company’s capabilities and in-house experience.

Demand from existing clients for Duratec’s services in the Pacific provides the Company’s Energy sector the opportunity to grow and expand its geographical presence. Australian-based opportunities are still plentiful as the Company continues to work with Santos on decommissioning works and the recent award of vendor status with Woodside will provide long-term maintenance opportunities for the Company.

On the back of major capital expenditure in previous years, the maintenance requirements continue to grow across Duratec’s clients’ assets in the Mining and Industrial sector. With the assistance of MEnD, the Company is working collaboratively with its clients to complete asset condition assessments and are a trusted partner in delivering the remediation scopes which it has vision of in the pipeline.

Increasing numbers of building owners across Australia are de-risking their portfolios or repurposing their assets by remediating the facades of their buildings. The Company’s strategic approach to leveraging its in-house building and facade design capabilities, coupled with its nationwide presence, has positioned Duratec well to work with clients and assist them in delivering their strategy in a safe and efficient manner.

The Company will leverage its strong position by taking a strategic and targeted approach to tendering and securing new work. Engaging with clients early will continue to be Duratec’s focus, to ensure it can convert its pipeline and deliver safe and quality projects with good financial outcomes.

The Company’s pipeline of work supports Duratec’s growth objectives, with solid revenue growth anticipated in FY25. The expected award of a number of significant contracts in the coming year is expected to drive further growth in FY26 and beyond.”

Valuation

I’ve updated my “pipeline to profit” model below making a number of assumptions for future profitability.

ROE for FY24 was 36.2%, down from 41.7% in FY23. Shareholder equity has grown 28% to $59.1 million, or 23 cps (21 cps at the end of FY23 due to increased share count from 247.4 million to 258.5 million). Projecting forward using my updated “pipeline to profit” model I am expecting NPAT of $29.2 million in FY26 and ROE to be c. 34%. This year Duratec will pay 4 cps out of its 8.8 cps earnings in dividends, a payout ratio of 45%, which means they will be reinvesting 55% of earnings back into the business at a return on shareholder equity of c.34%. The gross dividend yield is 4.4% at the current share price of $1.30.

Using McNiven's Formula and assuming current shareholder equity of 23 cps, future ROE of 34%, 55% of earnings reinvested into growth at 34%, the remaining 45% of earnings paid out as fully franked dividends (3% fully franked or 4.4% gross yield) and requiring a 12% annual return I get a valuation of $1.43 per share. At the current share price of $1.30 I think you could expect an annual compound return of c. 12.6%. The PE at the current share price is 14.8. I expect earnings to be c 11.2 cps in FY26. Working on a PE of 14.5 the share price could be approx $1.60 by FY26. I don’t think that’s unreasonable.

I have decreased my valuation from 4 weeks ago due to lower ROE expectations over the next 2 to 3 years (previously 39%).

Held IRL (3%)

July 2024

The Duratec share price has been creeping up lately. I thought I should revisit my valuation. Looking back on my previous valuation ($2.00), I was working on a forward ROE of 41%. To be slightly more conservative, and in line with analyst consensus, I’m bringing this back to 39% going forward.

Using McNiven’s Formula assuming current equity of $0.21 per share, with 70% of earnings reinvested back into the business at a ROE of 39%, future dividends paid at 30% of earnings (expected to be c. 3.5% fully franked), and requiring an annual return of 12% (same as last valuation), I get a valuation of $1.80.

I could be jumping the gun updating my valuation ahead of the FY24 report. I will be watching the order book closely, anticipating some contact wins in defence and the order book increasing to over $400 million.

April 2024

Durutec had a record 1H24 result and the second half looks even better (c. $300 million in revenue based on FY24 guidance).

EBITDA and NPAT Margins have both improved:

The FY24 EPS forecast is backed by company guidance (mid-range):

Commsec analysts are forecasting 17% EPS growth on FY23 earnings over the next 3 years.

FY23 ROE was 41.7%. Based on guidance ROE will be c. 48% for FY24. Based on analyst forecasts ROE should be approx 41% over the next 3 years.

The balance sheet and cash flows are expected to be strong. Duratec are cashed up and well positioned to make further acquisitions, buy back shares, or increase dividends (expected to be c.4% fully franked this year).

Source: Simply Wall Street.

The biggest concern is the order book is slightly down (5.7%) on this time last year. This is the only thing I can find to explain the 30% fall in the share price since January ($1.70 down to $1.20). The current weakness could also be driven by some profit taking from early investors. The offer price on listing in November 2020 was $0.50 per share. These investors have done extremely well.

The business is diversified across several sectors with 42% of 1H24 revenue coming from Defence. The Australian defence budget has been growing.

Duratec is well positioned to continue expanding revenue in future years, with a strong order book ($387.8 million), open tenders of $1.02 billion, and an identified pipeline of work of $3.74 billion. The addressable market is large compared to Duratec’s current share.

Valuation

Using McNiven’s Formula and assuming forward ROE of 41%, current equity of $0.21 per share, reinvested earnings at 70%, dividends fully franked, and requiring an annual return of 12%, I get a valuation of $2.00.

At the current share price ($1.20) I am expecting an annual return of 15.8%.

Disc: Accumulating on weakness IRL (1.6%)