Ph Capital: Decmil - The Early Mover in Mining Services?

Decmil Group (DCG)

Rationale:

DCG provides design, civil engineering and construction works for the resource, infrastructure and accommodation sectors. Currently its business comprises three operating divisions:

Decmil Australia - specialises in design, civil engineering and construction to Australia’s oil and gas, resources and infrastructure sectors;
Eastcoast Development Engineering – specialist engineering business acquired in 2013; and
Homeground Villages – village providing accommodation services to workers in QLD’s resources hub.

Performance for FY2013 was better than expected, however management has been actively positioning the business in anticipation of a potential decrease in projects exposed to the resources and oil and gas sectors. Despite this, revenue over the 2013 financial year was geared mostly towards resource sector projects (59.5% of revenue), then oil and gas (32.5%), accommodation (7.0%) and finally Infrastructure (0.9%).

In considering a medium term investment in DCG, the real risk surrounds a downturn in the coal, iron ore and LNG oil and gas markets in which DCG operates. Such a downturn would directly impact on all aspects of the DCG business. An opportunity to invest in DCG however arises following management’s foresight to diversify future revenue streams toward alternate segments of the market (for eg Commonwealth Government Department of Immigration Manus Island facility). Thus a case can be established that DCG should outperform mining service pure plays and a hedge against this risk could be positioned accordingly.

Applying a long/ short strategic approach to DCG, i.e. investing a short position in a basket of peer mining service securities should protect a DCG trade against the key risks surrounding this investment, namely decrease in the mining and resources sector, while allowing DCG to benefit from the upsides which differentiate it from its competitors.

Key Metrics:

Recent Developments & Results

12 Month Security Price and Volume

Recent Developments

27 Aug 2013: DCG Announces 8cps dividend (higher than consensus expectation), payable 27 Sep 2013 and record date of 6 Sep 2013. This will result in FY dividend of 12cps, 2cps higher than FY12

1 Jul 2013: DCG awarded a $137m contract from the Commonwealth Government for the construction of a major facility on Manus Island in PNG

18 Apr 2013: DCG completes acquisition of Eastcoast Development Engineering – cost of $19.3m upfront with further $10m in Arp 2014 if target returns achieved

10 Apr 2013: DCG wins $71m worth of contracts (2 contracts) to design and construct port and rail facilities to service the Roy Hill Iron Ore project. Work is to commence in 2014

6 Mar 2013: DCG wins a $25m contract to construct a support facility in NT for Shell Development Australia, responsible for the design and construction of the facility

11 Dec 2012: DCG wins $30m contract with Rio to cover a range of infrastructure works

30 June 2013 Results

Please refer to attached Results Presentation from 22 August 2013 for further detail.