17-Oct-2024: Duratec's newsletter, InSpec, their Spring edition has been emailed to me today - here's a link to the online version: The spring edition of InSpec is here!

It's interesting, and gives some insight into some of the things they do. I sold my DUR here earlier this week and no longer hold them IRL either - not because I'm bearish on them, just because they no longer look like one of the best opportunities across the market for me to make money at current levels.

I bought DUR in April at between 99 cps and $1.23, then sold some in August at $1.30, then sold the dividend shares at $1.415 last month, and the rest at $1.64 two days ago - I see better upside in LYL right now. DUR is still good, but they were a lot better at around $1/share to $1.25/share. DUR has been rising, and they look relatively fully valued to me here for where they are and their current order book, and if they can keep growing that revenue and their earnings, I may well jump back onboard in the future.

Meanwhile, Lycopodium (LYL) has been dropping, as they often do when they go ex-div and don't release any news, and that's something that LYL shareholders need to expect - they do not have promotional management - they do not blow their own trumpet, to the point of not even providing percentage increases on their increased revenue and earnings every report - we have to calculate that ourselves - as you can see I have done in my "valuation" for LYL.

Anyway - this may explain my thinking at this point:

Same sector; not exactly, they are very different companies, but generally these engineering & construction and mining services contractors get lumped in the same basket despite their significant differences. Point being, DUR has been in an uptrend since May when they briefly dipped below $1/share, and LYL is in a downtrend that started in late July and accelerated after they went ex-div on September 19th for their 40 cps fully franked dividend, as I expected would happen.

This is fine.

No really, it is. Lycopodium has no debt, and they have a reduced free float due to high insider ownership.

That was their insider ownership a year ago - in November 2023 when I last broke it all down. 36% of the company owned by their Board and Management and another 25% held by insto's, so their free float is less than 40% of the company, being the only reason they haven't been added to the ASX300 index yet.

Anyway, what am I doing, this straw isn't even about them - it's about Duratec - DUR - a good company, but... in my humble... NOT the best use of my investment dollars at this exact moment in time, particularly when I have LYL as an option.

So, yeah, nothing wrong with DUR, just not one I'm holding right now.

$DUR announced the award of two ECI Defence contracts at HMAS Stirling to its 50:50 JV with Ertec, with values of $10m ($1.9m and $8.1m).

While immaterial for FY25, the deliverie phases will be in FY26 and FY27, and will be more material for the ultimate winner.

Judging by the muted market reaction, I'd highlight a few points:

• For engineering and construction infrastructure projects, the design and planning phase is typically 5%-10% of the ultimate project cost. (Can be lower, can be higher, depending on scope and scale, and how detailed the design deliverables are.)
• So, in the success case we are talking about projects probably worth order of magnitude $100-$200m, or $50m-$100m net to $DUR.
• ECI involvement in design and planning gives the contractor a strong inside edge leading up to the bidding for the execution phase. Essentially, they are advantaged in being able to more precisely determine execution risk, leading to a better bid. This isn't always true, as a competitor could misprice risk on the downside (particularly if they were desperate for work!) However, with the market still pretty tight in infrastructure contractiing, that is less likely. Given this knowledge assymetry, clients often don't take ECI contracts to market, and instead have an independent advisor review the project proposal.
• To quantify, this potentially moves $DUR from a 25-30% CoS (without ECI) to a >70-80% CoS on ultimate award, with more certainty on the project margin ultimately achieved.
• $DUR are increasingly using their MEND capability to get better scope definition in early design. They'll no doubt be using it here, and it is a real edge over competitors who don't yet have the capability.

So, while not material for FY25, it is leading up to a potentially nice piece of work for 2026 and 2027.

$DUR has had a very strong SP run over the last 6 months, so anything other than a very material project award (>$100m) is probably unlikely to move the dial.

But good news, nonetheless.

Disc: Held

Duratec has just won two significant contracts. One in its own right and the other through its 49% owned business, DDR Australia. The DDR Australia project which is with the Department of Defence is the largest project ever awarded to DDR. To get these contract wins in perspective, the Duratec component represents about 12% of the order book and 9% of the revenue reported for FY24. That’s a decent win!

Held IRL (2.9%)

ASX Announcement

Highlights

• Duratec secures $21.8m Energy sector project for the King Bay Supply Base (KBSB) Wharf Refurbishment, its first direct contract with Woodside Energy Ltd (Woodside)
• DDR secures $54.7m contract forming part of the Project Phoenix portfolio of work for Department of Defence (Defence) in the Northern Territory (NT)

Duratec Limited (ASX: DUR) and DDR Australia (DDR), Duratec’s 49% owned associate business, have been awarded two new significant contracts across the Energy and Defence sectors. Duratec has secured the KBSB Wharf Refurbishment Project on behalf of Woodside, while DDR has been awarded a contract with Defence to deliver a critical portfolio of work across the NT as part of the Project Phoenix portfolio of work.

• KBSB Wharf Refurbishment – Located within the Port of Dampier in Western Australia, the KBSB Project is a $21.8 million Onshore Services Contract with Woodside, that aims to extend the service life, maintain the operational efficiency, and enhance the safety and resilience of the existing wharf facility. Pre-work is anticipated to start in November 2024, with commencement on site scheduled for February 2025, and expected completion by end of 2025.

• DDR Defence Contract Award – At an overall contract value of $54.7 million, this is the largest contract awarded to DDR to date. The project’s key objectives within the portfolio of work includes, refurbishment of existing buildings, upgrade of engineering services at transmit and receive sites, construction of a new receive site, installation of new fibre optic link cables connecting transmit and receive sites, and decommissioning of high-frequency communications infrastructure. Early civil works are targeted to commence in October 2024.

The combined duration of the current works is anticipated to be 30 months. This opportunity will be delivered with regional delivery partners ensuring that local businesses benefit from the contracted works.

Asset remediation and maintenance specialist $DUR announced their FY24 results.

ASX Announcement

Their Headlines

• Record Revenue of $555.8m (up 13%)
• EBITDA of $47.6m (up 22.6%)
• NPAT of $21.4m
• Gross profit 17.3%, up from 16.7% in FY23
• Strong cash on hand of $65.2m, with a cash conversion of 84% in FY24
• Annuity style contracts of $145.8m, making up ~26% of revenue
• Improved order book with quality tender opportunities continuing to grow
• Early Contractor Involvement (ECI) presenting significant opportunities across the business

My Analysis

The result was well-guided to at the end of May.

NPAT growth of 11.6% is well below what we've seen in recent years/underwhelming, but meeting expectation. Note: the analyst TP is about +21% ahead of the market, so room for SP to continue to advance (if you believe that means anything!)

Net Margin % of 3.9% the same as FY23 - so managing costs and commercial exposures well. (And better than FY21 3.0% and FY22 2.5%)

I include the updated picture on pipeline - slight increase in order book. The continuing build in Tenders bodes well for the year ahead. "Pipeline" is more a "whatever you want number" - but being high means they have line of sight to lots of work, and therefore can be selective in bidding for jobs that play to their strengths.

Joining the call at 11am.

Overall looks good.

Disc: Held in RL and SM

Sometimes (actually often!) when screening companies and then doing the deep dive prior to initiating a position, important details don't really sink in properly.

Shareholders of $DUR will today have received the latest edition of the company magazine, and one aspect of it really made me sit up and pay attention (turn to pages 20-21.)

While I understood that $DUR was extending its core focus of asset remediation and extension to the energy sector, via the acquistion of WPF (Wilson's Pipe Fabrication), its passed me by how significant this move is in the context of the challenge over the next 2-3 decades of decommissioning Australia's offshore oil and gas facitilies. (This is actually embarassing, because I have been involved for 25+ years in the energy sector!!) By this I mean that I noted the scope potential, but didn't fully grasp the materiality or the opportunity or the broader strategic fit for $DUR.

"There are more than 1,000 oil and gas structures in Austrlian water. The Australian Petroleum Product and Exaplorations Association (APPEA) estimates that decommissioning these facilities could cost $50 billion over the next 30 years."

So the penny dropped: a deep core corporate capability in existing asset remediation and extension + an acquired oil and gas industry construction capability + innovative tech in remote asset mapping (MEND) - which will be hugely applicable in the offshore environment.

There are also multiple barriers to entry in this sector: Offshore + Oil & Gas.

This is a major potential multi-decadal growth driver for $DUR and I didn't properly consider this in my investment thesis. Some oversights are fortuitous!

Disc: Held in RL and SM

Moelis have updated their valuation on $DUR following the guidance update earlier this week, bringing the valuation down from $1.62 to $1.50.

Analyst Report (ASX free broker report service).

The shift in the Moelis model is instructive, with the valuation now at a 37% premium to today's close of $1.095.

While its towards the lower bound of my valuation range, for brevity, I'll post this as my valuation on SM.

The report notes that the major $450m tender for the Defence Garden Island works, in which $DUR has a 50% interest in the JV alongside strategic partner Ertech. This will be a key test of 1) the ability of $DUR to win major work with a core repeat client, and 2) evidence of the competitive edge achieved through the ECI model. (I'd almost go so far as to say it is central to the thesis - but that would be overstating the case.) In any event, newflow on this in FY25 will be key.

Disc: Held in RL and SM (BTW, I did add the second 2% tranche in RL, so now holding RL 4%)

In February this year 44% of Duratec’s order book consisted of Defence projects, and management believes this represents only 1.3% of the total addressable market (TAM) of $17 billion. This was before the Labour government announced additional defence spending over the next decade.

On the 24 November 2023 Duratec’s order book was down 6% pcp. The weaker order book appears to be the main reason for the share price weakness since Duratec announced a record 1H24 result on the 23rd February 2024.

The defence budget is about to receive an additional $5.7 billion per year from this year, and $50 billion more over the next decade, compared with the funding trajectory of the previous Coalition government.

By 2034, annual defence spending will be about $100 billion, hitting 2.4 per cent as a share of the economy. This year’s defence budget is about $53 billion, just over 2 per cent of GDP.

As part of the Defence budget review an additional $1.4 billion will be directed towards upgrading northern bases instead of defence buildings in Canberra.

In the 1H24 presentation Duratec said they were well positioned to capitalise on accelerated defence spend in key regions such as NT and WA. While we haven’t heard any news of project wins from Duratec yet, the stars are starting to align for more defence projects in the NT.

Held IRL (2.6%)

Part of my potential investment thesis for $DUR is a belief (or rather a question) that its more stable business compared with sector peers allows for better talent management and, as a result, industry outperformance.

** I've referred to this analysis in previous posts. It didn't clearly indicate what I though it might, but as I know several StrawPeople are interested in $DUR (and other firms referenced), so I have gone ahead and written it up. **

$DUR performs less cyclical work (compared with sector peers) due to its focus on asset refurbishment and life extension. This should enable better workforce management and career development, which in turn should drive higher performance than sector peers. If the firm is well-managed, this should lead to it retaining a cadre of key project management and engineering personnel, who understand its systems, processes, scope types and clients. This part of the potential thesis derives from my career exposure over 30 years to capital projects, where a common (universal!) factor in project underperformance is the capability of the project management team. A key capability and performance driver is staff turnover. High staff turnover leads to "hiring risk" including misalignment with company culture and processes, in addtion to performance/capability factors. These are major contributors of project underperformance, which can be very material.

I conducted an analysis, via data-mining LinkedIn profiles, of staff at $DUR in the key populations of:

• Project Management: including Project Managers (PM), Senior Project Managers and Site Managers. These are the key roles responsible for delivery of contracted scopes of work.
• Operations Managers and Area Managers: roles which oversee multiple project teams within a geographical area and/or industry vertical.

As well as measuring tenure at the firm, the analysis looked for evidence of career progression and development of individuals, e.g., project engineer-to-project manager-to-operations manager.

For the PM population, I conducted a parallel analysis at industry peer $LYL – a known high performer in the sector (covered extensively here by @Bear77 and @Rick ). $LYL faces the additional challenges of being more exposed to the commodity cycle, delivering more work through contractors, and having a more diverse international portfolio of mining projects.

Key Findings

Far from showing stable workforce tenure at the Project Manager (PM) level, if anything, $DUR tends to show a high level of PM turnover (avg. tenure = 3.2 yrs), even after making some allowance for portfolio growth (adjusted avg. tenure 3.5yrs). (This compares with an average tenure of 7.7 yrs of the equivalent population at $LYL)

In the PM population, staff at $DUR have held on average held 1.5 roles (1.8 at $LYL) at the firm.

However, $DUR appears to compensate for high PM turnover via the management layer of Operations Managers (OM) and Area Managers (AM). Holders of these positions demonstrate both longer average tenure and there is a strong propensity to appoint people to these roles who have developed through the ranks at $DUR. OMs and AMs have nearly always previously held one or more Project Management roles. For staff in these roles, average tenure at $DUR is 6.3 years, with staff having held on average 2.5 positions at $DUR. Importantly, of the 23 staff in this population, only 2 have been hired externally at this level in the last 3 years, with all others have been developed internally.

Finally, from an analysis of Employee Reviews at Glassdoor.com, the average $DUR rating = 3.5 is in line with the Industry Average (3.5-3.6 - see note at end of Straw), indicating $DUR is not distinctive in people management. (See graph at end of Straw)

Conclusion

There is no evidence, based on this analysis, that $DUR is distinctive in the management of its cohort of key project management professionals. Therefore, there is no evidence to indicate that better project management capability will drive industry outperformance in this area. The differentiated people management part of the potential investment thesis is not supported.

Limitations

The methodology was based on measuring the time employees have remained employed with the firm. While high turnover in the engineering and construction industry is one indicator of management capability and company culture, it is not a perfect indicator. Indeed, it is perfectly arguable that an underperforming firm and management team may have long tenured staff, e.g., by failing to manage performance effectively.

Secondly, Glassdoor reviews are susceptible to manipulation by management. (e.g., Management/HR teams encouraging managers and targeted high performers to submit reviews). Some of the firms also have a small population of reviews, and the scores can be disproportionately skewed by a small number of “outliers” for whatever reason.

Figure 1: Glassdoor Reviews Analysis

Analysis of data in graph:

Review-weighted Industry Average = 3.69

Review-weighted Industry Average (ex-WOR) = 3.51

Unweigthed Industry Average = 3.61

I have cited 3.5-3.6 as a better Industry Average for small/mid cap firms due to the dominant impact of the number of $WOR reviews in the dataset.

Interesting Unintended Finding

$LYL comes out looking pretty good in this analysis, so I've definitely put it on my watchlist!

sell down 8.5 million shares in the Company.

DURATEC LIMITED (ASX:DUR) - Ann: Partial Share Sale, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Staedy Left to right chart Here:

DUR:

Duratec Limited is an Australian contractor providing assessment, protection, remediation, and refurbishment services to a range of assets and infrastructure. Headquartered in Wangara, Western Australia, the company has fifteen branches around the country in capital cities and regional centres, delivering services across multiple sectors including Defence, Commercial Buildings & Facades, Infrastructure (Water, Transport & Marine), Mining & Industrial, Power and Energy.

Defence:

Dedicated to the delivery of capital facilities, infrastructure and estate works program projects.

Mining & Industrial:

Provision of tailored preventative maintenance programmes.

Buildings & Facades:

Completion of facade condition assessments and facade restorations.

The Board - Greys n Blond

Good news day for Duratec. Very nice trading update as management continues to under promise and over deliver.

In addition the significant increase in Defence spending announced by the government this week, should be a tailwind for them. The new equipment will need to be stored and serviced etc in new or upgraded buildings and given that the Defence department is currently 40% of their mix, you'd expect this will be helpful over time. Not sure if us ramping up our weaponry is great for humanity but probably good for Duratec!

Disclosure: I own DUR in both personal and Strawman portfolios