Global Construction Services (GCS)

Research Report

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.

Analysis

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.


Disclosure and Disclaimer

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This Research Report, accurately expresses the personal view of the Author(s). 

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The Author(s) of this report made contact with Global Construction Services Pty (Ltd) for assistance with verification of facts, admittance to business sites, access to industry/company information. No inducements have been offered or accepted by the company. 

Recommendation Definitions 

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 

Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months. Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries Index. DJ Carmichael Pty Limited’s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes. 

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Michael Eidne

Director - Research

Michael has over 14 years experience working in financial markets in South Africa, UK and Australia. Prior to joining DJ Carmichael, Michael held research analyst positions at Bell Potter Securities and Blackswan Equities. He also spent several years working as a consultant for various Perth-based resource companies before moving back to the equity markets. Michael is originally from South Africa where he was a portfolio manager at Edge Capital, which is a large South African alternative investment manager. He also worked for a number of years at Investec Asset Management as an investment analyst.

Michael has a MSc in Mineral and Energy Economics from Curtin University and a MBA in Finance from the University of Cape Town.