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Click on the photo to view the Duratec 3D model of a Main Roads Timber Bridge. Drag and expand with two fingers. The detail is incredible!
@mikebrisy, I’ve been exploring the Duratec website trying to better understand the services they provide. The whole-of-life asset management service is really interesting.
On the Duratec website I found some interesting information about one of Duratec’s unique services. I can see how these services would be sought after by government and big industry to manage and maintain infrastructure to avoid costly and unnecessary premature deterioration of assets. The following is from their sustainably page on the Duratec website. The detail in the 3D models developed by their engineers is incredible (I wonder if they are client of Pointerra?) Here’s an example of a 3D Model of a Main Roads Timber Bridge. Click on the link and explore the structure. There are other examples in the 3D models link below.
Duratec is a solutions-driven contractor, providing whole-of-life engineering, construction and remediation services.
We work to extend the life of existing assets and infrastructure. In doing so, we help to reduce reliance on the development of new infrastructure. In partnership with our clients, we work to provide long-term, sustainable and intergenerational outcomes whilst considering harsh environmental factors.
With an in-house technical team, one of our unique offerings is our ability to provide condition assessments to determine the level of deterioration and decline, and then develop 3D models of these assets to assess and monitor changes over time.
As a national contractor working across a range of industries, we understand the potential environmental impacts of our work are varied. With this in mind, we work in strict accordance with our Environmental Management System, certified to ISO 14001.
Claude held Duratec until its peak in February 2023, then sold. Perfect timing Claude! What a master!
The reason Claude sold is behind the paywall, so I’m none the wiser. This is one opinion I would hold in very high regard. I’ve joined the waiting list to be a subscriber to “A Rich Life”. I guess I’ll just have to wait until Claude lets me in!
After Claude sold (well I assume he sold) another article appeared in May 2023 regarding upgraded guidance. That’s behind the paywall also. :(
If you’re looking for a “very well researched”, DEEP DATA BEAR CASE (cough, cough…excuse me!) on Duratec you should tune in to Mathan Somasundaram on “the Call” (37:47 into the podcast) https://podcasts.apple.com/au/podcast/the-call-from-ausbiz/id1506523664?i=1000648704155
For those who don’t have time to listen (or simply prefer not to) I’ve jotted down some “deep data” notes. This is value investing at its absolute best! I couldn’t help myself from adding in a few comments in brackets throughout! Sorry, it’s a bit cheeky! :)
Duratec…GET OUT!
Disc: Do your own Research! This is for educational purposes only, and it doesn’t consider your personal circumstances. Nor does it consider anything related to the reports, company financials, or future prospects of the business.
Sorry! I couldn’t help it!
In the quarterly rebalance effective prior to the Open on March 18, 2024, Duratec will be added to the S&P All Ordinaries Index (ASX: XAO). This will not affect the valuation of the business, but could lift the demand for the stock from fund managers.
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%)
The market has turned bearish on Duratec (DUR) recently. I’ve had it in my watchlist for a while and today I’ve finally added IRL (0.8%). I hope to add more on further weakness. I’m a little late to the party on this one, missing some incredible growth since it listed. However, I still see a lot of potential going forward.
Again, I agree with @Karmast’s reasons for holding Duratec and valuation of $2.20. At the current price of $1.23 I am hoping for an annual return of approx 16% (McNiven’s Formula).
There’s a lot to like about this business, much of which @Karmast has already covered, +40% ROE, low 27% debt on equity, and $58.5 million in cash. Management has provided guidance for record revenue in FY24 (between $570 million to $610 million). I am expecting earnings to be approx 10.4 cps (midpoint of revenue guidance $590 million, 4.37% NPAT margin, NPAT of $25.8 million) which would put Duratec on a FY24 multiple of 11.8x.
If the business can continue double digit earnings growth from here, +40% ROE, while reinvesting 70% of its earnings back into growth, that would make this quality business sound reasonably cheap. While past performance is not an indicator of future performance, the historical revenue growth for Duratec has been very impressive since it was established in 2010. In fact, revenue growth has accelerated since listing in November 2020 at an offer price of $0.50 per share.
More cash than debt (Source: Simply Wall Street)
ROE increased to 41.7% in FY23, Expecting +45% in FY24, and circa 40% over the next few years (Chart from Commsec)
Held IRL (0.8%)
Updated valuation in Feb 2023 based on 10 cents EPS for FY24 (after 50% increase in EPS and Dividend at H1 FY24 report) and 15% growth rate for next 10 years with PE of 14.
Happy to add more on sell down after great H1 report but for some, worries over small reduction in open order book. The business has improved a lot, outlook is still excellent over 5 years and the market is offering up an opportunity in my view.
Why do I own it?
# Small cap which provides maintenance and repairs to all kinds of infrastructure in Australia (bridges, tunnels, defence facilities, offices etc)
# Has 10 years of 32% p.a. growth including pre listing and also has founder / owners who hold 30% of the company.
# Has approx. 1% market share of their stated domestic market so should be lots of room to take share still
# Debt to equity ratio of 37% and high ROE / ROCE of over 41% / 33%.
# Big MOS at current price of $1.30 in Feb 2023 at only half the previous growth rate.
# They can deliver double digit revenue and earnings growth for 5 + years so the return should exceed my 15%p.a. + target
# Probably has structural tailwinds as Australia keeps growing and spending more on infrastructure that will need maintenance
What to watch
# Net profit margins are low - need to see it steady or growing and execution needs to be strong
# Board is very concentrated - good to push for / see some independence and new skills added over time
# May have lumpy years due to contract nature of business - win a big govt contract and sales spike and vice versa
# Dept of Defence is 40% of business. Their spend is planned to grow for next 10 years but Duratec must keep them onboard
# Read Sohra Peak updates for another holders views
DUR-231117-MA-Initiation-of-coverage-Buy.pdf [17-Nov-2023: Moelis Australia initiated coverage of DUR with a "Buy" call and a $1.50 TP.]
DUR-231127-MA-Update-Guidance-at-AGM.pdf [27-Nov-2023: Moelis Australia provide an update concerning DUR's Guidance given at their recent AGM - Buy call maintained, TP increased from $1.50 to $1.62.]
Disclosure: I do not hold Duratec (DUR) shares.
https://www.duratec.com.au/investors/financial-reports-presentations/
Duratec announced to the market it has changed the date of its AGM today for the third time time in the last two weeks.
This and the three founders selling down about 10% each of their holding (they have gone from 11.18% to 9.68% ownership) seems to have spooked the market over the past 3 weeks.
There was nothing in the annual report that I could see suggesting a change in momentum of the business although it is not expected the defence segment will grow as quickly as it did in FY23.
An item of business at the meeting will be the re-election and appointment of directors.
Is it uncommon for a company to change the date of its AGM like this?
Transparency and integrity have always been a strength of the management.
sell down 8.5 million shares in the Company.
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
-Duratec came in at the top end of their twice upgraded revenue and EBITDA guidance:
-They had a total of 1944 projects (compaired with 1664 in FY22)
-Their workforce increased by 20%
-Wilson Pipe Fabrication (WPF), the first substantial acquisition for the company, has been a sucess and has the highest margins within the business (gross margins about 30%)
-The Mining & Industrial, Energy and WPF segments have the highest margins and are growing quickly on a forward looking basis
-NPAT margin increased from 2.5% in FY22 to 3.9%
-The orderbook has $458.2m ($458m FY22) however this excludes $60-70m of master services agreement
-One legacy heritage structure remediation project impacted the FY23 results due to scope/access/location. This was still completed to a high quality
-Significant increased revenue of $229m ($135 FY22) with $252m in the orderbook
-This is the lowest margin segment about 13% gross margins
-Recent slowing of estate works due to cancellation/reprioritisation of projects that no longer suit the national defence strategic review (released May 2023)
-Revenue of $86m (up from $65m in FY22) with $105m in the orderbook
-This is a higher margin segment about 21% gross margins
-Second half of the year significant increase in award of iron ore industry upgrades comencing with BHP Berth wharf at Port Headland
-Revenue of $78m (up from $65m in FY22) with $82m in the orderbook
-This segment has a gross margin of about 15%
-TAM $12b
-Revenue of $47m (up from $12m in FY22) with about $60m in tenders
-Higher margin segement about 21% gross margins
-Significant fuel security and upgrade works upside
-Highly motivated management team
-A key vertical acquisition for the energy segment
-About 30% gross margins
-Voted contractor of the year (Santos 2023 Directors awards)
-TAM $60b from decommissioning of offshore oil and gas infrastructure as the economy decarbonises
-Full in-house solution
-Asset management council innovation award 2023
-Since BHP win (discussed above) new enquires from an international gold miner with a variety of assets
-Duratec has 49% ownership
-Revenue of $33m (down from $72m in FY22)
-A delay in tender award decisions has reduced the work over FY23
-Executive directors
-Employee expenses increased to $35.8m (from $27.8m in FY22)
-FY23 had a big increase in revenue driven by the Defence segment
-This flowed through to the bottom line and the NPAT margin and cash position improved
-The new WPF acquisition is earnings accretive and provides an important vertical for the Energy segment
-Management demonstrated excellent capital allocation with the acquisition of WPF
-The decommissioning of offshore oil and gas projects as we decarbonise has a TAM of $60b with WPF/Energy segment well placed to win this work
-Managements ability to risk manage project selection is a moat
-Mend consulting (Unique 3D modeling) is gaining traction and leading to commercial work
-It is unlikely that the Defence segment will continue at the same rate as it did in FY23
Disclosure held irl
Key Points:
-A high quality national engineering, construction and remediation company with some vertical integration, listed in 2021, current market cap $298m
-Run by the 3 founders with strong shareholder alignment owning over 30% of the company
-High quality, conservative management: average annual growth rate over 12 years of 32%
-Management recently upgraded guidance for FY23: revenue $465-495m (up from $310m FY22), EBIDA $36-39m (up from $11.7m FY22)
Key Business Drivers:
-aging infrastructure eg. wharfs/ bridges
-poor original construction eg water proofing
-expansion of existing assets
-stricter building codes eg fire proof cladding
Key Markets:
-Defence: about 50% of revenue. DUR has a presence on 52 defence bases in Australia. Bipartisan approved 10 year spend. Over 25,000 defence buildings that will need something done. Current big project RAAF Base Tindal aviation refuelling works
-Mining and Industrial: about 25% of revenue. Current big project is Western Sydney International Airport fuel infrastructure
-Building and façade: about 15% of revenue. Current big project is recladding Central Park Building in Perth
-Energy/ Transport and water: about 10% of revenue. Recently purchased Wilson’s Pipes Fabrication which supply materials to DUR
Business Model:
-Quality rather than a quick fix ie. solid repair solutions
-DUR will do a 3D model conditions survey to tag the engineering problems (they are the only company in Australia doing this), then DUR suggest solutions, sometimes it is put out to tender or they are given the work to complete
-DUR are usually 1 of 2 or 3 competing for this work
-1500 projects in the past year (out of 4000 project they were offered): “It’s the jobs we knock back that make us successful”, Chris Oates GM/Executive director/Founder
Outlook:
-Since mid-may DUR has secured $30m in Mining and Industrial segment work
-Recently upgraded guidance for FY23 (management have a history of upgrading guidance):
*Revenue $465-495m for FY23 up from $310 FY22 (increase 50-60%)
*EBIDA $36-39m for FY23 up from $11.7m FY22 (increase 208-233%)
-Using data from the half yearly accounts net margin likely to be about 4% on a NPAT of $18-20m
-More than double last year's profit result
(I got here by using EBDITA guidance of $36-39m. 1HFY23 NPAT conversion was 7.85/15.6 = 50%. Therefore expected NPAT for FY23 of about $18-20m. This is a net margin of 18/465 = 3.9%)
Issues:
-A low margin business. FY22 net margin was 2.5%
-It is a high cap ex business
-A competitive sector keeps margins down. Their biggest competitor Monadelphous had a net margin of 2.9% in FY22 on a market cap of $1.15Bn. Monadelphous has had flat revenues and EPS for several years and is not showing any growth
Conclusion:
-A quality business performing quality engineering work with highly aligned and quality management
-Growing rapidly
-50% of business comes from defence which is not cyclical and very sticky
-Has a strong national footprint and some vertical integration and is the only one of its competitors doing 3D model generation
-FY23 DUR should earn 8.2c/share. That is based on their guidance which they have a track record of being conservative on. On their current PE of 19.4 the market is assuming EPS of 6.1c. Should be about $1.59 based on the current PE. This is assuming the market wants to keep DUR at a PE of 19.4
I've been looking at Duratec and I like what i see. An excellent company doing excellent engineering run by excellent management.
My major concern is the low net margins of the business. These margins have fallen from a pre-COVID 5.5% in FY18 down to 2.5% in FY22.
This is a question for @Karmast who seems to know this company well. What is your take on this? Is this COVID effecting costs? Do you think these margins will rebound for FY23?
Good presentation and brief Q and A with CEO Phil Harcourt this week here - https://www.youtube.com/watch?v=FfltJKQyCdY
Looking forward to Strawman securing a session with them soon, so we can dig in deeper but without the tech glitches at the start!
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