Lycopodium BUY Recommendation March 2021

Target Price: $6.62/share

Investment Thesis

Lycopodium has recently released half year results which were inline with expectations. With completion of Yaoure in December margins remained strong with NPAT at 8.8%. With full year guidance of “approximately $160m in revenue and NPAT in the order of $12m” our focus is increasingly shifting towards FY’22. We are looking towards an emerging EPCM/EPC boom with the with roll out of covid-19 vaccines globally, we expect projects which were previously delayed to be greenlit. This outlook is supported by strong gold prices and record iron ore demand which we expect to continue through FY’22. In the background Lycopodium’s JV with Monodelphous – Mondium looks
set for a further growth through FY’22 with completion of the Western Turner Syncline; which should drive stronger margins. Our price target reflects our growing confidence in the EPCM outlook.

Key points

• Revenue of $71m, EBITDA of $10.6m and NPAT of $6.3m (EHSL $5.7m).
• Margins were heathy 8.9% at the NPAT level and towards the top end of historical rates between 5%-10%.
• Balance sheet remains strong; cash of $84.4m and net assets of $82.1m.
• Negative operating cash flows of $15.7m – expected given build-up of working capital at 30 June, we look for cash balance to normalise to ~$67m at full year.
• A fully franked Dividend of 10c per share declared (ESHL 9.3c); we now look for 20c full year distribution.
• Contribution from Mondium (LYL’s 40% JV with Monadelphous) up 15% HonH and 155% on PCP, we expect this contribution to become more meaningful through FY’22 ($4.2m).
• Management have provided full year earnings guidance of “approximately $160m in revenue and NPAT in the order of $12m” – in line with our previous FY’21 forecasts of $160m Revenue and NPAT of $11.7m.

Outlook

• Demand for EPC/EPCM contractors through FY’21 and into FY’22 is expected to strengthen with the resources sector set to continue to benefit from both the Gold and Iron Ore prices.
• 12 month Price Target of $6.62 is a 9x multiple on FY’22 EBIT forecasts.