Civmec is listed on the SGX Mainboard with a market capitalization of about S$385M and public float of about 58%. It is an integrated, multi-disciplined construction and engineering services provider to the resources and infrastructure sectors. It supports 3 markets (Oil and Gas, Mining & Infrastructure & Asset Management & Integrated Services) through 8 disciplines (Heavy Engineering, Modular Assembly, Structural Mechanical & Piping Installation, Site Civil Work, Precast Concrete, industrial Insulation, Offshore Logistics and Maintenance) and has established 3 facilities in Australia: Henderson (120,000 sqm – biggest in Western Australia), Darwin and Broome.

Investment Merits

• Ability to generate higher than average net margins of 8%
• Competitive advantage with the only sea-side facility of its kind in WA with high quality process tracking systems for operations optimization.
• In only 5 years, shown to be able to sequentially integrate new capabilities over time including ability to deliver subsea work
• Although there’s a multiyear cyclical softening on O&G and Mining CAPEX, the secular resource production trend is still up. Australia is conservatively planning to increase their resource exports by 5% CAGR to from 2011 to 2025.
• Additionally, the New Infrastructure Growth Package in govt budget will bolster gradual declining O&G and mining CAPEX in medium term
• Experienced management
• Management has already guided that 1H15’s activity will be similar to 2H14’s elevated revenue numbers, we conservatively estimate this will conservatively lead to ~+15% y/y revenue and net earnings growth for FY15.

Re-rating catalyst

• Good earnings visibility in FY15 as guided by management
• In the longer term, we opine that the market, being bearish on Australia resources for some time, likely has not completely digested the new increase of infrastructure spending by the Aus. Govt’s and its likely positive impact on Civmec that has infrastructure building capabilities.
• Potential for Civmec to grow both geographically and/or through acquisition.

Investment Actions

We think that 10x P/E is a reasonable price to pay for a profitable, competitive engineering proxy to WA, with a track record of project execution, stablizing macro, and possible further growth potential. Accordingly, we issue an "accumulate" rating on Civmec, with TP of $0.80, based on 10.0x FY15F P/E.

Source: Phillip Securities Research - 27 Oct 2014