Summary Key Points
GCS is construction services company that supplies on-site workforce, scaffolding, plant and equipment, formwork and concreting, site services and other specialised services. GCS is headquartered in Perth but operates across all major regions in Australia.
GCS’s Revenue and EBITDA are growing: Thanks to ongoing expansion of the business onto the east coast and diversification into other services, GCS’s revenue is growing. Revenue growth has not been at the expense of margin as the bulk of the increase in 1HFY17 revenue has dropped through to the bottom line with a 12% increase in top line growth resulting in an 8% increase in EBITDA and a 24% in underlying NPAT.
GCS has a strong balance sheet: The balance sheet has strengthened over the last several years. Net Debt has dropped from a high of $63m to a negative - $14m in the first half of this financial year. Considering the trading conditions in WA for anything to do with construction or mining services over this time period, this is an outstanding result. The bulk of the debt in a businesses such as GCS is in equipment financing and according to management, outstanding HP commitments over equipment is at a low-level relative to the book value of the asset base. This has put GCS in a strong position when competing for new work as it has pricing flexibility due to the fact a much smaller portion of its gross margin goes to financing costs.
GCS pays dividends: GCS paid a fully franked dividend last FY of 1c per share. The group also declared a fully franked special dividend of 2c in November 2016 on the back of the divestment of the Smartscaff business as well as declaring a 1HFY17 1c fully franked dividend. This brings the total cash returned to shareholders of 4c per share or $8m. Investors can expect this trend to continue as the business continues to perform well and produce excess cash.
GCS has partnerships with major Australian contractors: GCS has strong relationships with the major contractors operating in Australia. It has also made several good acquisitions that have enabled GCS to increase the breadth of its service offering. For example, GCS recently acquired 51% of Gallery Facades that specialises in the installation of facades in commercial and residential projects across Australia. This business has a $100m forward order book.
GCS has resurrected itself from a precarious debt position some years ago, and has managed to achieve this result in the face of declining construction activity in its home market of Western Australia. The turnaround in growth and capital management has been thanks to the efforts of a quality management team that has successfully diversified the business into new markets and sectors. The heart of the GCS business is the hire of construction related equipment to contractors but this business can be susceptible to a downturn in activity if a large proportion of the equipment is financed. Importantly, GCS have aggressively paid down its debt commitments, leaving it with a low level of equipment financing relative to the plant and equipment on hand. The outright ownership of its gear gives GCS the flexibility to be competitive in what is a very competitive market.
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SPECULATIVE BUY – Potential 10% out-performance, but high risk
BUY – Potential 10% or more out-performance
ACCUMULATE – Potential 10% or more out-performance, buy on share price weakness
HOLD – Potential 10% underperformance to 10% over performance
SELL – Potential 10% or more underperformance
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