Consensus community valuation
$0.615
Average Intrinsic Value
208.7%
Undervalued by
Active Member Straws
#Overview
Last edited 4 months ago

Contruction and engineering firm with 40 years experience, specialising in Infrastructure, resources and renewable energy. Operates Australia wide.

The business enjoyed strong growth during the WA resources construction boom, but revenues dropped by more than half as that surge in work ended. (a reminder: C&E businesses are very cyclical, and competitive -- margins can shrink a lot when work dries up).

Decmil has since broadened into other sector and expanded its geographic reach. It now has a record $900m order book to FY22 and is expecting a continued pick-up in project activity and improving margins.

In the boom years, the company was generating EBITDA margins of ~12%, compared to just 3.7% at present. That's a huge difference, and although its unlikely to see a return to previous levels anytime soon, there's definitely room for improvement.

Back in the resources contruction boom, an EBITDA multiple of 4 -5 was about typical for shares. So in terms of valuation i'm going to say 4.5 is reasonable.

In a recent presentation, the company had a forecast for ~$750m in revenue by FY21. It has $80m in net cash

For FY21, let's apply an EBITDA margin of 5% and an EBITDA multiple of 4.5 -- that gives us a target price of roughly 70c (240m shares on issue). Or an intrinsic value 53c if we discount back for 2 years at 15%pa (I tend to use relatively high discount rates for these kind of businesses, as an added margin of safety)

Under more conservative assumptions, let's apply a 4% margin to $700m in revenue, but keep everything else unchanged. That gives us an IV of 39c

As you can see, there's potential for a lot of operational leverage, and even seemingly small changes to one variable can give a wide array of outcome. If you also start playing around with sales and multiple estimates, the valuation range can get very wide. (i get a 'best guess' range of between 35c and 60c)

Coupled with the unpredictability of the industry, and hence the unprdictability in sales and margins, i'm usually reluctant to invest in these kind of businesses. Market sentiment can also change very quickly.

But, i certainly acknowledge that when the various factors are working together (sales, margins, share price multiples), sharesholders can do remarkeably well.

For example, if the next few years play out even a little better than the company hopes, and market sentiment becomes more favourable for this sector, it's not hard to justify a current valuation of >80c (77% upside from current price).

I could tighten my valuation if i was closer to the industry and business, so would definitely welcome any other perspectives.

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#Bull Case
Added 2 weeks ago

https://www.asx.com.au/asxpdf/20200514/pdf/44htt7gsmccwrf.pdf

Colonial First State Investments just purchased ~6% of the company yesterday (13.05.2020).

I don't expect there was any goodwill included in this purchase so an obvious indicator that Decmil is still significantly undervalued. 

Enough said......

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#Decmil - Watchlist
Last edited 4 months ago

Although two directors have bought decent bundles of shares ($50k and $27k) and Thorney International (one of the few fund managers I take notice of) bought more shares after the big price plunge in December, when Decmil released updates, I will leave this on the watch list for the time being and monitor. There is usually no rush to buy after big price declines. I like the company and think investors over-reacted to the news.

I thought about buying DCG late last year, but went with SRG instead. The P/E for DCG was about 32 at the time, I think.

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#Substantial Holders
Last edited 2 weeks ago

List of trades by substantial shareholders of Decmil Group (DCG) since their last substantial shareholder list was published (from Commsec):

  • BlackRock Group, Buy, 19 Jun 19, old: 5.18%, new: 6.93% (4,393,258 shares bought)
  • Carol Australia Holdings Pty Limited, Buy, 02 Aug 19, Old: N/A, New: 8.20%
  • Mitsubishi UFJ Financial Group, Inc., Buy, 02 Aug 19, Old: N/A, New: 8.87%
  • Commonwealth Bank of Australia, Sell, 02 Aug 19, Old: 9.50%, new: 8.03% (3,475,246 shares sold)
  • BlackRock Group, Buy, 03 Dec 19, old: 6.93%, new: 7.94% (2,479,618 shares bought)
  • Thorney Opportunities Ltd, Buy, 23 Dec 19, old: 10.21%, new: 11.68% (3,630,000 bought)
  • TIGA Trading Pty Ltd, Buy, 23 Dec 19, old: 10.21%, new: 11.68% (3,630,000 bought)
  • Paradice Investment Management Pty Ltd, Sell, 23 Dec 19, old: 6.45%, new: N/A
  • Carol Australia Holdings Pty Limited, Sell, 27 Dec 19, old: 8.87%, new: 7.40% (3,422,150 shares sold)
  • Mitsubishi UFJ Financial Group, Inc., Sell, 27 Dec 19, old: 8.87%, new: 7.44% (3,333,549 shares sold)
  • Commonwealth Bank of Australia, Sell, 27 Dec 19, old: 8.03%, new: 6.39% (3,861,840 shares sold)
  • Carol Australia Holdings Pty Limited, Sell, 30 Dec 19, old: 7.40%, new: 6.13% (3,049,656 shares sold)
  • Mitsubishi UFJ Financial Group, Inc., Sell, 30 Dec 19, old: 7.44%, new: 6.14% (3,115,875 sold)
  • Commonwealth Bank of Australia, Sell, 30 Dec 19, old: 6.39%, new: 5.11% (3,049,656 sold)
  • Commonwealth Bank of Australia, Sell, 13 Jan 20, old: 5.11%, new: N/A
  • BlackRock Group, Sell, 30 Mar 20, old: 7.94%, new: N/A
  • Thorney Opportunities Ltd, Buy, 30 Mar 20, old: 11.68%, new: 17.17% (13,137,341 bought)
  • TIGA Trading Pty Ltd, Buy, 30 Mar 20: old: 11.68%, new: 17.17% (13,137,341 bought)
  • Commonwealth Bank of Australia, Buy, 13 May 2020, old: N/A, new: 6.06%

Note: TIGA is Thorney Investment Group Australia, so TIGA Trading and Thorney are the same holding, not different holdings.  Likewise, Carol Australia Holdings P/L is a controlled entity of Mitsubishi UFJ financial group, so Carol's holding is included in Mitsubishi UFJ's holdings.

Decmil Group's Substantial holders at 30 June 2019 were:

  • Thorney Investments Group, 26,024,227 shares, 10.92%
  • Denis Criddle, 22,479,145 shares, 11.61%
  • Commonwealth Bank Group, 20,466,031 shares, 8.59%
  • BlackRock Group, 16,520,645 shares, 6.93%
  • Paradice Investment Management Pty Ltd, 15,358,597 shares, 6.44%

...for a total of 44.49% of the company.

The latest list (as at 14 May 2020) according to the transactions listed above is:

  • Thorney Investments Group, 17.17%
  • Denis Criddle, 11.61%
  • Commonwealth Bank Group, 6.06%
  • BlackRock Group, no longer substantial shareholders
  • Paradice Investment Management Pty Ltd, no longer substantial shareholders
  • Mitsubishi UFJ Financial Group, Inc., 6.14% (which includes the 6.13% owned by MUFJFG subsidiary Carol Australia Holdings)

...for a total of 40.98% of the company.

So, since June 30, 2019...

  1. 3.51% less of the company is owned by substantial shareholders.
  2. The Commonwealth Bank, and their subsidiary Colonial First State, own 2.53% less of the company now.
  3. In a strong show of suppport, Thorney/TIGA have increased their holding from 10.92% to 17.17% with their most recent purchase being on March 31.
  4. Denis Criddle, the founder of Decmil still maintains his 11.61% holding.
  5. Denis Criddle's son, Scott Criddle, who is Decmil's CEO and MD, did sell $1m worth of shares in May last year, leaving him with 2.08% of DCG at that time, but he has been awarded 1,216,667 more Performance rights since then and had 606,122 performance rights converted to shares upon vesting - on 02 Sep 2019, and now owns 5,552,104 DCG shares (2.32%) plus performance rights.
  6. Paradise and BlackRock have exited the list (sold down or out of DCG entirely)
  7. Decmil have a new substantial shareholder, Mitsubishi UFJ Financial Group, which bought CFSGAM - Colonial First State Global Asset Management - off CBA in August 2019, which included CFSGAM subsidiary Carol Australia Holdings - now also part of Mitsubishi UFJ FG.  CFSGAM and Colonial First State are two different companies, and while CBA sold CFSGAM, they retained Colonial First State - see here.  The majority (if not all) of Mitsubishi UFJ's position in DCG was gained via the acquisition of CFSGAM on August 2nd, 2019.  Since that time, they have not bought any more shares and have sold down their position twice.
  8. DCG's share price then (30 June 2019) was 91 cents per share.  It is now 78% lower at 20 cps.
  9. Last month (on 16 April 2020), Decmil announced that their NZ subsidiary Decmil Construction NZ Limited (DCNZ) would cease trading with immediate effect.  The NZ subsidiary suffered significant losses as a result of termination of a major contract by the NZ Department of Corrections (“DoC”), following a dispute the parties have agreed to take to arbitration for financial settlement. 
  10. DCG are now selling assets and felt the need to report to the ASX and the market today (14 May 2020) that their bank (NAB ) will maintain its current facilities and ongoing support for Decmil through to the end of January 2021.

 

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#Bank Facilities Update
Last edited 2 weeks ago

14-May-2020:  Decmil Update on Bank Facilities

Reading between the lines, it sounds to me like Decmil Group (DCG) might be in some trouble and NAB have agreed not to pull the rug from under them before the end of January (2021).  On May 4th (10 days ago), Decmil confirmed a newspaper report that there is a sale process underway for their Homeground Gladstone Village (accomodation village in Qld) and that they were currently negotiating with three parties and had received one firm offer. 

Here's some of today's announcement:

 

Decmil Group Limited (ASX: DCG) is pleased to announce it has confirmed facilities with its long-term banker National Australia Bank (NAB). 
 
NAB will maintain its current facilities and ongoing support for Decmil through to the end of January 2021, at which point Decmil expects to negotiate a fresh debt facility, preferably also with NAB. 
 
In addition to the NAB facility, Decmil has also confirmed an agreement with the Company’s four surety bond providers that no cash call will be made on the bonds before 31 January 2021. 
 
The effect of the combined agreements is to give Decmil operational certainty to continue moving the business back to strong profitability and to aggressively pursue new business opportunities, as well as enhanced optionality over capital opportunities. 
 
Under the arrangement with NAB, Decmil will continue to draw upon its $65 million multi-option facility. The active components of the facility are a $25 million corporate loan (fully drawn) and a $25 million overdraft facility (currently drawn to approximately $5 million). The facility also includes a contingent instruments facility and an accounts receivable financing facility. 
 
Under the arrangement, Decmil has committed to reduce the overdraft sub-component of the facility to $10 million from 31 January 2021. The $65m overall facility limit remains in place for the period to 31 January 2021. 
 
Decmil and its advisers continue to explore a range of capital options to strengthen the Company’s balance sheet and to best position the Company for anticipated strong growth in the business. 
 
While COVID-19 has impacted on Decmil and many other contracting businesses, the Company expects a strong FY21 on the back of major infrastructure spend by Federal and State governments as they seek to re-ignite economic activity. 
 
Decmil is strongly positioned to gain from this spend, with current projects underway for the state governments of Victoria, Queensland and Western Australia. 
 
The latest project started last week, a $3.5 million contract to relocate a diesel shed for Queensland Rail. This follows Decmil’s recent announcement that the Company had been awarded preferred tenderer status for an $11.5 million contract for roadworks on the Bruce Highway by the Department of Transport and Main Roads Queensland. Decmil also recently announced it had been confirmed as a contractor on the Bayswater Station Metronet project in Western Australia by lead contractor Coleman Rail, with a minimum work program worth $25 million. 
 
Based on current contracts and expectations, Decmil expects a return to operating profit and positive operating cashflow in FY2021. 

--- click on link above for more ---

 

I don't like Decmil - I don't have a high opinion of their management who didn't cover themselves in glory in prior years.  They have a history of building accomodation units for prisons and detention centres (including offshore detention centres) and then getting into disputes with their clients.  They announced last month that they were closing down their NZ operations immediately after realising that they were unable to resolve a dispute over a $NZ185 million (A$181.5 million) prison contract, which was terminated by New Zealand's Department of Corrections (DOC) on February 25.  They are currently a loss-making company, and despite their "hope" to return to operating profit and positive operating cashflow in FY2021, I wouldn't go near them.  There are so many better companies out there, with superior management teams.  No need to rake around in the mud.  Decmil are like a sick crab that may not survive for much longer, but can still bite you in the meantime.

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