Programmed For Success
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While some areas of Programmed's business look flat in comparison with last year, the pipeline of long-term opportunities does look healthy - particularly given reasonable tendering success.
Staffing, maintenance and project services company Programmed Maintenance Services Limited (PRG) is one of those stocks that rode the resources boom, but have struggled with perceptions of the downside of that boom.
Resources sector work comprises more than half of PRG’s earnings, and when that area is running hot, the company is humming. In FY12 (year ended March 31), for example, PRG almost tripled its profit, driven by a near-doubling of the earnings from its resources division, on the back of the division’s exposure to offshore oil and gas projects in Australia's northwest.
Then, in FY13, while revenue rose 9% to $1.52 billion, net profit was up a more sedate 3%, to $32.1 million (including an abnormal tax benefit of $2.7 million.) Revenue in the resources division was flat, but the division managed to lift its earnings by 10%, as margins increased for onshore work.
For the year to March 2014, PRG reported a net profit of $31.1 million, down 3% on the previous year – and effectively returning the group’s profitability to where it was in 2012.
The Resources division’s EBIT fell 21% in FY14, due almost entirely to reduced onshore mining project activity. The offshore oil and gas sector contributed all of the Resources division’s earnings, which fell from half the company’s earnings to 39% – with a major hit from scheduled work on Chevron’s Wheatstone LNG project being pushed into FY15.
However, the Property & Infrastructure division – which provides electrical, painting and repair services – was able to lift its earnings by 21%, to $28 million, substantially picking up the slack. This division contributed 44% of the company’s total earnings before interest and tax (EBIT) in FY14.
The Workforce division, which supplies staff to all business sectors, largely maintained its earnings at $10.5 million (versus $10.7 million in FY13) despite lower revenue, because of reduced operating costs helping to boost margins. The Workforce division contributed 17% of FY14 EBIT.
The fall in resources income was the major problem seen by the market, with the property and infrastructure division left to do most of the work in lifting earnings.
In July, at the company’s annual general meeting, PRG management gave a trading update for the first quarter of the current financial year (FY15), the three months to June 2014. The company said activity in the Property & Infrastructure division, remains in line with the previous corresponding period, but a number of new long-term maintenance contracts had been secured which are expected to contribute to revenue growth for the division in the second half of FY15.
These include a five-year contract with NZ Housing to maintain social housing in Auckland and Wellington, a three-year contract with Fonterra to maintain its logistics distribution centres across New Zealand, and a 14-year contract for the maintenance of Gatton Prison in Queensland. Management added that the division was also tendering or negotiating a “significant pipeline” of further long-term maintenance opportunities.
In the Resources division, trading in the first quarter of FY15, work-in-hand and tendering indicated that offshore oil and gas activity was continuing at similar levels to last year; while in the Workforce division, lower demand indicated “further weakening of the market,” particularly in the blue-collar, light industrial and manufacturing sectors. PRG said the division was “investing in technology to lower costs and reshape the way the business operates in an online world.”
Management said that PRG's cash flow remained strong, net debt was low and, despite some current market weakness, the company was “well-placed to enact its strategy to grow its operations over the long-term.”
That would be good news for shareholders, who have seen the shares slide from $3.40 at the start of 2014 to $2.72. The shareholders are still sitting on a 12-month total return of 14%, and a three-year performance of 19.4% a year, but the five-year record is poor, at 0.4% a year – a period that was affected by PRG’s slump to a first-half loss in FY11, on the back of a suite of problems that included industrial disputes in the Resources division and costs taken on the sale of the company’s UK business.
Over the last two years, PRG has bought specialist turf business Programmed Turnpoint and invested in start-up online staffing business OneShift, of which it owns 27.5%. The company put $5 million into OneShift in October 2013 to “advance our knowledge and position in the online space,” and to diversify its business offering further. At the AGM in July, PRG identified “more than $3 billion of opportunities to target over the next 12 months.”
While some areas of the business look flat in comparison with last year, the pipeline of long-term opportunities does look healthy – given reasonable tendering success. Certainly, more contract wins in the Property & Infrastructure division are required to offset the expected decline in the Resources division’s work.
But the share price’s difficulties in 2014 do work in the favour of value-oriented investors, who can see a fairly attractive opportunity. At $2.72, PRG is trading on 10 times FY15 earnings, and a fully franked dividend yield of 6.6%. It is also priced about 9% below the analysts’ consensus target price, at $2.98. Investors can certainly make a case to buy PRG 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