Consensus community valuation
Slowly catching up with companies I follow/own but not many others do, as this is of more interest than the already excellent coverage others have provided on more common holdings.
I cannot prove the same depth or quality of assessment as others, particularly in breaking down in questioning financial statements as more esteemed members, but hope there are some points that are worthwhile.
For context (and for new members), GNP is one of my largest holdings in my portfolio outside of Super. I have been happy with their progress since I have owned and so far the thesis is holding and panning out pretty much as well as I could have hoped. This is not a company with fantastic near term re-rate potentials, but I hope to be one of those steady 15-20% compounders. Rare gems.
In summary, it was another great half with headline numbers all impressively up (with exception of their debt - due to an acquisition)
They split their business into three segments, infrastructure, industrial and telecommunications
To me, the first two are an ever increasingly overlapping set of circles in a Venn diagram.
They infrastructure and industrial segments are mostly exposed to the "green revolution" of the renewable energy grid build out. Predominantly this means pylons, batteries and smart grid upgrades to existing networks. But an increasing part of their contracts have a repair and maintenance contract build in which gives a recurring revenue:
This is increasing quickly and gives a small degree of downside protection to the investment thesis. These segments contribute the majority of the earnings. Interestingly, the "telecoms" servicing business which I had always thought to be a lemon and an irrelevance to the rest of the company, has had a spectacular turn around:
It is also good to see the revenue by geography slowly become less concentrated in WA. This remains a significant risk.
EPS has increased 50% vs pcp
Overall a great result and......
The outlook is rosy:
The only issue was the suspension of the dividend, which caused an intra-day drop in the SP of ~6% from memory. It is now up 7% from the pre-announcement SP.
I am happy with this decision as I believe this reflects a conviction that the company can achieve a higher ROIC with that money than returning as dividends, to the benefit of all shareholders.
David Riches, the Director, is a 50% shareholder.
HELD IRL & SM
Not the largest contract in the world, but another proof of concept win.
Ausgrid supply 1.8 million homes in NSW. This is one of their first smart grid upgrades, and GNP are in the box seat. Importantly, this is an east coast contract, validating their take over activity of the last few years.
There has been a fair bit of discussion of engineering services companies on Strawman, I remain non-plussed why this company hasn't received more love. It's kicking goal after goal and rewarding shareholders handsomely. The energy transition and grid re-build is only just starting with an expected $16-20 billion price tag over the next 10 years.
It's still reasonably priced and one of my biggest holdings IRL.
C
Pretty good result from GNP as largely flagged in previous updates.
All metrics improved significantly and they confidently predict increased contracts wins and higher recurring revenue through service contracts. It is largely due to the rapid increase in the Industrial segment, see below, which builds electrification solutions (Poles, wires and BESS stations)
EPS have leapt to 10.8 cent, up 43.4%, this makes the current ~PE 20. They predict strong growth of the medium term and "at least 20% increase in EBITDA", so not expensive for company with good medium term growth prospects. Maybe a forward PE of 15?
The other aspect that is gratifying to see is the ROE start to trend beck up towards where it has been historically 15-25%. This fills me with a bit more confidence that the recent big acquisitions have been successful and it is becoming a quality company.
I'll do a valuation a bit later today if I get the chance
EDIT: PE should have been 20 not 9.2. Ive rounded it up to 20 for simplicity. A few more comments included
GNP published their 1/2yr today. The headline numbers are positive and the SP has edged higher after appreciating significantly over the last few months:
They have been expanding eastward from their home state of WA and are staking a claim to be part of the $20 billion "re-wiring the nation" program. This "new grid" has been talked about a lot over the past few years but the Government is actually starting to throw some real money at it now, and this can be seen by how large the potential order book is now. GNP have a healthy pipeline of works and have been winning contracts fairly regularly in all states. There are three arms to the business but I am predominantly interested in the New Energy Infrastructure section.
Before they expanded eastward, they had a very healthy ROE in excess of 25% (at one point in excess of 40%), but given the investment and re-structuring required to compete in the Eastern states this has dropped to the low - mid teens.
Of note, I was pleased they elected to not pay a dividend but instead re-invest the cash into growing the business.
My thesis for this company is as follows:
- there are healthy tailwinds creating a sh*t-ton of work that needs to be done over the next 10 years and beyond
- GNP have demonstrated they can win large contracts and deliver them
- As efficiency returns to the business, they will return to their above average ROE and hence become a highly attractive business
The risks are the that they cannot return to that higher ROE because:
- they are competing in a new market, with new operating costs and I am comparing apples to oranges
- they bid for a big contract and find they are on the hook for a blow out in costs
- the cost of labour continues to escalate and their margin gets eroded away by the time arbitrage thingy working in reverse
it is therefore concerning that contract and labour hire costs are increasing proportionately faster than revenue:
I currently hold - please see valuation straw for updated numbers
@Noddy74 thanks for your straw on GenusPlus. Coincidently, I have recently added GNP to my watch list (don’t hold yet).
For what it’s worth, Steven Anastasiou from Bell Potter has forecast the following (data on Simply Wall Street):
Revenue: FY23 $454 million, FY24 $493 million and FY25 $544 million.
NPAT; FY23 $12 million, FY24 $23 million (13 cps).
I’m not sure what you think of these estimates @Noddy74. If they turn out to be correct that would get the business back to a ROE of c. 20% and I think that would make GNP good buying at the current price of 96 cps (7.4x FY24 earnings). The outlook sounds promising, bar the inflationary headwinds.
OUTLOOK (from 1H results announcement)
The Company orderbook is strong with $413 million work in hand comprised of $215 million for FY23 and $198 million FY24.
The tendered pipeline of $1.446 billion, up from $848 million at the end of FY22 and budget pricing and opportunity leads (excluded from tender pipeline) have increased to in excess of $3 billion which represents strong growth potential for the group.
The Group expects to see continued growth from its east coast operations. The Federal Governments $20 billion Rewiring the Nation Plan is designed to ensure the transmission infrastructure is funded & delivered. Genus is one of the few Australian companies operationally capable of completing large-scale Transmission & Distribution projects and is set to benefit from the Rewiring the Nation Plan.
Genus expects to return to strong growth in the medium term with a large pipeline of renewables, transmission projects and network connections to drive medium to long term growth in the business.
The increased focus of the network issues around Australia should see significant opportunities present during the coming 10-20 years as the Australian power network goes through a substantial transition from traditional energy source of coal to generation from new and renewable energy.
Genus continues to manage challenges across the supply chain, inflation and labour supply and we expect them to continue into FY2023.
Disc: not held
There was nothing particularly wrong with this report, but I was hoping for more.
As a recap - GNP have been executing on a strategy to expand their core WA based business to the East coast by acquisition.
They have made a number of purchases over the last few years and have been successful at bidding for a lot of contracts. Consequently revenue has increased significantly, but EBIT and NPAT, not so much. In many ways this is to be expected when bedding down acquisitions, dealing with both pandemic induced labour market disruptions, supply chain disruptions and an inflationary environment - so perhaps I am being unrealistic.
I am not able to give any insight into the accounting differences between the normalised and non-adjusted figures.
Due to the increased share count from the takeover of FPA, the EPS has actually decreased:
They make much of the forward order book and pipeline being enormous. And this is great but only if its possible to make a bigger profit off all this increased work.
Management have flagged that FY23 will be a year of consolidation. It remains to be seen whether they can cope with all the pressures of assimilating new acquisitions in new geographical areas, plus all the labour market, supply chain and cost increases whilst increasing profitability.
From my reading, and David Riches repeated and sizeable on market share purchases, I have a degree of confidence that GNP can fix this. Will have to watch for drift in my thesis over next 12 months, but happy to hold for now.