Update

Upgrade to BUY (Target Price: SGD 0.475). Stock price has tanked well below what the fundamentals are.

Civmec shares have sold off 37% to S$0.395 over the last 7 days. Civmec management has responded citing a large motivated seller (but not a substantial shareholder) selling for personal reasons. The sell-off was likely exacerbated due to the breaching of the S$0.52 technical multiyear support level.

We use more conservative estimates and revise down our FY15 earnings forecast by 5% (EPS of 5.8 cents vs 6.0 cents) to increase our margin of safety in terms of execution. We revise down our target price to 47.5 SGD cents based on 8.2x FY15 PE.

We believe Civmec is a quality company where management is executing competently, including recently refilling its orderbook via recent order wins. Net earnings will take a hit this year due to shifting of project focus and investment into new markets. Although growth initiatives will take at least one year to show meaningful progress, we think the current price makes Civmec a compelling value investment.

Conservative valuation

We based Civmec’s valuation at 10x FY15 PE vs 9.5x FW15 PE (Monadelphous). This is conservative because we believe Civmec has more growth potential and it is operating at relatively high ROEs versus their peers.

We factor this downward based on the multiple difference between the STI (fwd PE = 14x) versus the ASX200 (fwd PE = 17x) to arrive at 8.2x fwd PE.

Source: Phillip Securities Research - 20 Mar 2015