WGN is looking for new sites for concrete plants and quarries across Brisbane, Gold. Coast and Sunshine Coast. On track
Building Materials│Australia│Equity research│February 21, 2018
Wagners Off to a good start
ADD (no change) Current price: Target price: Previous target: Up/downside: Reuters: Bloomberg: Market cap:
A$3.90 A$4.22 A$4.21 8.3% WGN.AX WGN AU US$496.6m A$629.4m US$2.02m A$2.61m 161.4m 47.2%
Average daily turnover: Current shares o/s Free float:
Vol m
Price Close
Relative to S&P/ASX 200 (RHS) 145.0
3.50
128.3
3.00
111.7
2.50 25 20 15 10 5
95.0
Dec-17
Jan-18
1H18 pro forma NPAT of $14.3m was above our estimate of $12.9m, with strong (+18%) cement volume growth. Continued pick up in aggregates, crushing/haulage and WGN’s faster re-entry into fixed concrete, all contributed to the positive earnings momentum. At this stage we have assumed lower cement volumes in 2H18, although WGN could match its first half performance and outpace our forecasts. Annualising the 1H18 result would show an already much reduced indicative PE of 20x, demonstrating WGN’s earnings sensitivity to the cycle.
Solid first result
4.00
Dec-17
WGN reported a strong 1H18 result, reaffirming our confidence in WGN’s ability to leverage its earnings during periods of positive demand conditions.
Feb-18
The 1H18 result supports our view that WGN is a flexible operator capable of flexing its business under positive demand conditions. WGN reported 1H18 NPAT of $14.3m (vs Morgans $12.9m), 50% higher year on year. Contributing to the result: a) 18% increase YoY in cement volumes from two extra short-term contracts; b) higher aggregates sales from a ramped up Well Camp quarry; c) rising haulage/crushing services demand from a recovering mining industry; and d) robust demand indications for CFT from both domestic and offshore markets.
Source: Bloomberg
Orderly re-entry into fixed concrete Price performance Absolute (%) Relative (%)
1M 3.2 4.2
3M
Adrian PRENDERGAST T (61) 3 9947 4134 E
[email protected]
12M
WGN revealed that it has commissioned two fixed concrete plants (in Brisbane and Toowoomba) in December, and is preparing to commission a third at Pinkenba in the next two months. Off to a quick start in its planned re-entry in to downstream, WGN plans to add three new plants per annum. While accelerated on its original plans (after customer Neilson signaled its intentions to leave in circa FY20), the steady pace of WGN’s planned expansion still shows an intention not to disrupt the established market. WGN is looking for new sites for concrete plants and quarries across Brisbane, Gold Coast and Sunshine Coast.
On track for solid FY18 1H18 NPAT of $14.3m represents ~62% of full year NPAT prospectus target of $23m. Even with January representing a seasonally quieter period for the construction industry, WGN is on track to comfortably achieve its prospectus forecasts for FY18. In addition to a solid start for traditional construction materials, WGN also reported accelerating CFT sales with WGN having tendered for $8m of work across USA, UK and NZ, in addition to a further $50-$55m of domestic work being pursued.
Maintain Add recommendation A solid initial result from WGN, although we see further upside potential on offer from larger potential contract wins. Updating our FY18 forecast for the extra project work in 1H18 now implies a 1H/2H skew of 57%/43%, versus normal 1H skew of 51-53%. WGN declared an initial AUD 1.5 cps interim dividend. WGN’s dividend policy is to payout 5070% of NPAT. We maintain our Add recommendation with a revised $4.22 price target (was $4.21) based on DCF, PE, EV/EBITDA methodologies. The key risk to our call is the size of growth needed in FY19 to justify a high current year multiple. Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)
Jun-17A 192.7 40.12 15.18 0.09 41.45 0.00 0.00% 19.43 24.76 (655%) NA
Jun-18F 234.6 52.59 28.44 0.18 87.4% 22.12 0.01 0.38% 13.30 NA 118% 10.61 156% 12.1%
Jun-19F 308.5 65.00 31.05 0.19 9.1% 20.27 0.12 2.96% 10.67 25.84 89% 8.77 47% (1.6%)
SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
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Building Materials│Australia│Equity research│February 21, 2018
Figure 1: Financial summary Profit and Loss (A$m) Revenue Other income Operating costs EBITDA D&A EBIT Net interest PBT Income tax Normalised NPAT Significant items Reported NPAT Reported EPS (cps) Norma l i s ed EPS (cps ) DPS (cps) Div payout ratio (%) Franking (%)
Jun-17A 192.7 2.7 -155.2 40.1 -11.8 28.3 -6.5 22.0 -6.6 15.2 0.2 15.4 9.5 9.4 0% 0%
Jun-18E 234.6 3.3 -185.3 52.6 -10.7 41.9 -8.5 30.9 -4.9 26.0 0.0 26.0 16.1 16.1 1.5 9% 0%
Jun-19E 308.5 2.1 -245.6 65.0 -14.5 50.5 -6.1 44.4 -13.3 31.0 31.0 19.2 19.2 11.5 60% 100%
Jun-20E 351.2 2.1 -281.6 71.7 -16.3 55.4 -6.1 49.3 -14.8 34.5 34.5 21.4 21.4 12.8 60% 100%
Cash Flow Statement (A$m) EBITDA Net interest Tax paid Changes in working capital Other operating cash flow Operating cash flow Capex Free cash flow
Jun-17A 40.1 -6.6 2.5 -0.9 35.2 -4.1 31.0
Jun-18E 46.2 -8.6 -3.5 -3.3 30.8 -12.7 18.2
Jun-19E 65.0 -6.1 -13.3 -5.0 40.5 -16.2 24.4
Jun-20E 71.7 -6.1 -14.8 -2.9 47.9 -14.5 33.3
2.2 -
0.3 -
-
-
Investing cash flows Increase / decrease in Equity Increase / decrease in Debt Dividends paid Other financing cash flows Financing cash flows
-1.9
-12.3 96.1 -84.6 -29.5 -18.0
-16.2 -18.6 -18.6
-14.5 -20.7 -20.7
Balance Sheet (A$m) Assets Cash And Deposits Debtors Inventory Other Current Assets Total Current Assets PP&E Other Non-Current Assets Total Non-Current Assets TOTAL ASSETS Liabilities Short Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Non-Current Liabilities TOTAL LIABILITIES
Jun-17A
Jun-18E
Jun-19E
Jun-20E
7.9 28.3 12.4 0.9 49.4 119.6 6.4 125.9 175.3
8.5 34.0 15.5 0.7 58.7 114.6 7.0 121.6 180.4
14.2 44.7 20.4 0.7 80.1 116.3 7.0 123.3 203.4
26.9 50.9 23.2 0.7 101.7 114.6 7.0 121.6 223.3
151.4 39.1 190.5 6.8 1.0 7.8
11.3 38.6 49.9 67.1 4.1 71.2
11.3 49.1 60.4 67.1 4.1 71.2
11.3 55.2 66.6 67.1 4.1 71.2
274.0 -285.9 -11.1 -23.0
371.3 -311.7 -0.3 59.3
371.3 -299.3 -0.3 71.7
371.3 -285.5 -0.3 85.6
Asset Sales/Purchases Other Investing cash flow
Equity Issued Capital Retained Earnings Other Reserves and FX TOTAL EQUITY
Key Metrics/Multiples Normalised PE Reported PE EV / EBITDA EV / EBIT P/FCF FCF Yield Dividend Yield Normalised ROE Normalised ROA
Jun-17A 28.8 28.4 14.6x 20.8x 8.1x 7.6% 0.0% -66.1% 11.3%
Jun-18E 23.5 23.5 12.9x 16.2x 20.3x 3.1% 0.4% 43.8% 19.4%
Jun-19E 19.6 19.6 10.5x 13.5x 15.5x 4.0% 3.0% 43.3% 17.4%
Jun-20E 17.7 17.7 9.4x 12.1x 11.3x 5.5% 3.3% 40.4% 17.4%
Jun-17A 20.8% 14.7% 11.4% 7.9%
Jun-18E 22.4% 17.9% 13.2% 11.1%
Jun-19E 21.1% 16.4% 14.4% 10.1%
Jun-20E 20.4% 15.8% 14.0% 9.8%
Jun-17A 150.3 -654.7% 118.0% 4.4x 3.7x
Jun-18E 69.9 117.8% 54.1% 4.9x 1.3x
Jun-19E 69.7 97.2% 49.3% 8.2x 1.1x
Jun-20E 60.6 70.9% 41.5% 9.1x 0.8x
DCF Valuation Operational CF Terminal CF Gross NPV
A$m 336.5 426.2 762.7
A$/share 2.08 2.64 4.73
Net Debt NPV
-60.3 702.4
-0.37 4.35
Margins (%) EBITDA margin EBIT margin PBT margin NPAT margin
Jun-16A 22.4% 14.6% 8.2% 9.3%
Gearing Net debt Net Debt / Equity Net Debt / (ND+E) EBIT Interest Cover (x) ND/EBITDA (x)
Premium(/discount) to SP
11.6% 9.0%
WACC (%) Multiple Valuation EV / EBITDA FY19F EBITDA Multiple applied Enterprise valuation Net debt EV / EBITDA valuation
A$m 65.0 12.0x 780.0 -60.3 719.7
A$/share
PE Valuation FY19F NPAT Multiple applied Enterprise valuation Net debt EV / EBITDA valuation Premi um(/di s count) to SP
A$m 31.0 22.0x 683.0 -60.3 622.7 -1.1%
A$/share
A$m 702.4 719.7 622.7 681.6
A$/share 4.35 4.46 3.86 4.22
Blended Valuation DCF EV / EBITDA PE Total valuation
Weight 33% 33% 33%
Premi um(/di s count) to SP Di vi dend Total expected shareholder return (TSR) Shares (millions)
4.83 -0.37 4.46
4.23 -0.37 3.86
14.3% 3.0% 17.3% 161.4
SOURCE: MORGANS RESEARCH, COMPANY
Figure 2: Changes to estimates FY17 June Year End Actual
New
FY18E Previous
Change %
New
FY19E Previous
Change %
New
FY20E Previous
Change %
Revenue
195.4
234.6
234.6
0%
311.0
311.0
0%
353.3
353.3
0%
EBITDA
40.1
52.6
51.0
3%
65.0
65.0
0%
71.7
71.7
0%
EBIT
28.3
41.9
41.5
1%
50.5
50.5
0%
55.4
55.4
0%
NPAT
15.4
26.0
25.4
2%
31.0
31.6
-2%
34.5
35.0
-1%
SOURCE: MORGANS RESEARCH, COMPANY
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Building Materials│Australia│Equity research│February 21, 2018
Investment view Apples and oranges The 1H18 result supports our view that WGN is a flexible operator capable of flexing its business in a positive demand environment, which positions WGN well for the construction cycle that is only just starting to gain traction. We expect this to be characterised by largely unchanged margins for WGN but materially higher earnings supported by its variable operating model. Starkly different to its larger peers who have large fixed asset portfolios spanning multiple markets, where margins shift with each cycle as they leverage economies of scale. These differences leave us with the opinion that WGN’s multiple should be more dynamic through a cycle. Accordingly we see an early-cycle premium in WGN as justified. We view 1H18 as indicative of the investment proposition in WGN. With the period portraying a business supported by stable underlying profitability while enjoying upside potential from its strong marketing abilities/relationships.
1H18 recap WGN reported 1H18 NPAT of $14.3m (vs Morgans $12.9m), representing ~62% of the company’s FY18 prospectus target NPAT of $23m. WGN declared an initial AUD 1.5 cps interim dividend. WGN’s dividend policy is to payout 50-70% of NPAT. Figure 3: 1H18 result overview 1H18 Result (A$m)
1H17 Actual 1H18 Actual
Revenue
1H18 Morgans
% Change YoY
HY vs Morgans
98.8
121.2
115.6
23%
5%
-43.9
-46.1
-45.4
5%
2%
Gross profit
54.9
75.1
70.3
37%
7%
EBITDA
23.5
28.7
25.9
22%
11%
EBIT
17.2
23.5
21.2
37%
11%
NPAT
9.5
14.3
12.9
51%
11%
24%
24%
22%
0%
6%
Cost of sales
EBITDA margin (%)
SOURCE: MORGANS RESEARCH, COMPANY
Cement volume surprise The highlight in the result was the 18% increase YoY in cement volumes in 1H18, driving the positive group result. WGN commented that the extra volumes were placed through two short-term contracts won during the half (one in Northern Queensland and the other in the Weipa region). At this stage we have assumed that WGN does not repeat this performance in 2H18, although the company commented that it intends to try. Second half cement sales are seasonally affected by the majority of January being a quiet period for the construction industry. With potential for further incremental volume growth from unexpected sources remaining high, we see upside risk remaining to our FY18 and FY19 forecasts. Fixed concrete re-entry WGN also outlined that it commissioned two fixed concrete plants (in Brisbane and Toowoomba) in December, and is preparing to commission a third at Pinkenba in the next two months. Off to a quick start in its planned re-entry in to downstream, WGN plans to add three new plants per annum. While accelerated on its original plans (after customer Neilson signalled its intentions to leave in circa FY20), the steady pace of WGN’s planned expansion still shows an intention not to disrupt the established market.
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Building Materials│Australia│Equity research│February 21, 2018
WGN is looking for new sites for concrete plants and quarries across Brisbane, Gold Coast and Sunshine Coast. CFT The company posted growing sales momentum in its CFT division, tendering for $8m of work across USA, UK and NZ. WGN commented that the majority of the work pursued was with customers likely to offer repeat business opportunities. A prime example being government managed national parks in the US that could offer substantial further work in additional boardwalks and short-span bridges. CFT projects also appears to be gaining further traction domestically in Australia. In addition to higher electrical crossarms sales, WGN also stated that it currently sees $50-$55m of possible new work that it is assessing for tender.. The company is already progressing plans for a fourth and fifth pultrusion line at its CFT facility at Well Camp. The fourth production line would further support domestic sales, while the fifth production line is intended to be dedicated to offshore work. New Generation Building Materials (NGBM) EBITDA remained unchanged at $1.1m, despite a 24% increase in revenue to $14.5m. WGN attributed this to its need to gear up for the growth to come, in particular hiring a dedicated offshore sales team. Figure 4: Segment overview
SOURCE: MORGANS RESEARCH, COMPANY
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Building Materials│Australia│Equity research│February 21, 2018
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Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.
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Regulatory disclosures Analyst owns shares in the following mentioned company(ies): Wagners Morgans Corporate Limited was a Joint Lead Manager and Underwriter for the initial public offer of shares in Wagners Holding Company Limited and received fees in this regard.
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