E&A: Enterprising and Ambitious
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While there is “significant margin pressure” as the process of disintermediation and cost reduction for all mining construction projects accelerates, EAL says tendering activity in the oil and gas sector remains high, and company subsidiaries expect to continue to win work in the coming six months.
The little-known E&A Limited (EAL) is starting to put together some compelling numbers, although like all service providers to the resources industry, it has seen its share price marked down this year. But Queensland LNG and CSG (coal seam gas) is emerging as a major growth area for this quiet achiever.
Capitalised at $70.2 million, EAL is a South Australian-based investment company that operates eight wholly owned subsidiaries across the mining, resources, defence, water, energy and financial services industries.
The operating segments are:
Heavy Mechanical and Electrical Engineering.
The division comprises services provided by Ottoway Engineering, E&A Contractors Pty. Ltd and ICE Engineering & Construction. Ottoway operates as a structural, mechanical and piping fabrication and construction business and offers project management including design, engineering, procurement, manufacture, fabrication, machining, installation and maintenance. ICE provides services and contract labour to the electrical and instrumentation sector of the industrial, water and mining sectors. E&A Contractors offers integrated solutions including project management, design, drafting, engineering, procurement, fabrication and erection, and on-site construction.
Water & Fluid Solutions
The businesses in this division are Fabtech and Blucher Stainless Systems. Fabtech provides flexible geo-membrane liners and floating covers for dams, reservoirs, channels and tunnels in mining, resources, potable and wastewater containment, waste management and agriculture industries. Blucher supplies stainless steel products for both drainage and pressure-piping systems for industrial and commercial applications.
Maintenance Engineering & Plant Construction
The division comprises services provided by Quarry & Mining Manufacture Pty. Ltd. (QMM) and Heavymech Pty. Ltd. QMM provides repair and maintenance, engineering and plant construction services to the quarry, recycling and mining sectors. Heavymech provides emergency breakdown, maintenance and machining services to the mining, earthmoving, foundry, water, marine, defence and power generation industries.
Investment and Advisory
The division comprises services provided by Equity & Advisory Pty Ltd. This division provides corporate advisory services relating to analysing, negotiating, financing and completing of business transactions for external and internal clients in public, private and government organisations. The company was put together by Equity & Advisory and floated on the stock exchange in 2007.
Since listing, the company has added the QMM, Blucher Stainless Systems and ICE Engineering & Construction businesses to its portfolio. Acquired businesses have generated $75 million in revenue, while organic revenue growth from existing businesses has been $125 million.
In the first half of FY14, more than 50% of revenue came from oil, gas and CSG. Exposure to this growth is a major part of the investment thesis: EAL is a major supplier of process infrastructure and water solutions for CSG, with a large footprint across Queensland’s Cooper Basin, and it won its first NSW contract in September 2013.
The company’s financial performance has been impressive. Over the five years to FY2013, sales revenue grew at a compound annual growth rate of 16%; earnings before interest and tax (EBIT by 48%; net profit after tax (NPAT) by 92%; and earnings per share (EPS) by 66%.
These more-than-decent numbers have been reflected in the share price. Over the past five years, EAL has generated total return (capital gain plus dividends reinvested) of 26.6% a year. The three-year figure is 84.2% a year; while in the past 12 months, EAL has returned 14.2%.
In the first half of FY14, the Heavy Mechanical and Electrical Engineering division accounted for 60% of revenue, followed by Water & Fluid Solutions (30%), Maintenance Engineering & Plant Construction (8%) and Investment and Advisory (2%).
In terms of industries, 53% of revenue came from oil and gas, followed by mining and quarrying (21%), infrastructure (17%), renewable energy (4%), defence (3%) and financial Services (2%).
For the first half of FY14, EAL met its guidance for a record half-year result, with EBIT up 7% to $7.6 million and NPAT up 7.3% to $4.4 million, on the back of a 19.8% lift in revenue, to $116.8 million.
Earnings per share slipped from 3.93 cents to 3.75 cents. The interim dividend was 2.75 cents a share, fully franked, up from 2.5 cents in the first half of FY13.
The best-performing division was Water & Fluid Solutions, which lifted revenue by 56% and EBIT by 163%, on the back of strong growth from CSG demand. Other highlights were the inaugural wind tower contract for Heavy Mechanical & Electrical Engineering (Completed inaugural 20 tower contract for Siemens) and ICE’s transition to the Oil & Gas sector.
LNG and CSG sectors are the major opportunities for EAL, with $116 million in expected revenue from these areas alone in FY14 – which will be more than half the total revenue. Four of EAL’s businesses supply into these markets: the company says most of its opportunity in this market is in the Queensland CSG/LNG projects and Cooper Basin. Queensland CSG/LNG has three major projects underway and due for completion 2015-2017, involving total capital expenditure of up to $90 billion. EAL supplies into most construction stages of the projects (for example, gas gathering, water management, pipelines, plant construction).
Operations and Maintenance (O&M) is the next LNG/CSG opportunity. EAL says total O&M spending for the seven LNG plants under construction in Australia is $4.1 billion a year from 2017, with the Queensland LNG plants representing about half of this. The company says its businesses are well-positioned to capture some of these long-term recurring revenue opportunities.
EAL is also looking to add new businesses to its palette. It says it is currently in discussions with acquisition targets that meet its investment criteria, and are either ideal bolt-ons for existing businesses, where management have earned the right for further reinvestment into their business by EAL – on either a geography and/or complementary service basis – or new services, with exposure to Oil & Gas and other diversified growth markets.
EAL has guided for FY14 second-half revenue and earnings to be better than FY13 second half, and comparable with the first half, from which it expects FY14 full-year net profit to exceed the record FY13 result. While there is “significant margin pressure” as the process of disintermediation and cost reduction for all mining construction projects accelerates, EAL says tendering activity in the oil and gas sector remains high, and company subsidiaries expect to continue to win work in the coming six months.
At 57 cents, EAL is priced on an historical (FY13) price/earnings ratio of 8 times earnings, and fully franked dividend yield of 8.8%. From the company’s guidance, investors should be able to expect an improved EPS result, so on a prospective basis a buyer at 57 cents is buying even cheaper than 8 times. Conversely, the prospect of an improved dividend will make the prospective yield even more attractive (although the investor would have to have picked up the interim dividend as well) – even if the company only repeated the interim dividend, EAL would be looking at a fully franked yield of 9.6%. This is a lightly traded stock – $35,000 worth a day, on average – but you can make a case for investing in EAL on those numbers.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au