Based in Western Australia, Global Construction Services (GCS) operates in the residential, commercial, resource and industrial sectors of the construction and maintenance industries. Operations have just expanded by the acquisition of Global Industrial Services ((GIS)), a specialised labour hire business.
The acquisition cost Global Construction Services around $42 million in cash and shares, while doubling the total workforce to around 800 employees. DJ Carmichael likes the purchase, noting it complements Global Capital’s existing business while broadening the service offering.
As well, the purchase creates a larger labour pool in what is a tightening market, while also generating around 2% accretion to earnings in FY12, estimates the Perth-based stockbroker. There is upside risk here if additional synergies can be extracted.
Global Construction Services and Global Industrial Services were significant clients of each other and serviced joint clients. This, plus the fact key executives from both businesses will be retained, significantly reduces acquisition risk in DJ Carmichael’s view.
The combined business appears well placed to win new contract work in the WA market according to DJ Carmichael. Such potential is significant, as there is currently $100 billion in committed projects now being developed in the North West region of the state. Global Construction’s expanded labour base means the group should be able to service any contract wins.
Earnings from the existing Global Construction Services operations are trending better than expected, DJ Carmichael noting management recently lifted guidance for FY11 earnings pre the GIS acquisition to a net profit of $19 million.
This represents an 11% increase on previous earnings guidance and is 9% higher than DJ Carmichael had been forecasting. Earnings estimates have been increased to reflect the new guidance, DJ Carmichael now forecasting earnings per share (EPS) of 20.2c this year and 21.4c in FY12.
A strong balance sheet is a further positive, as post an $18 million capital raising as part of the GIS acquisition, DJ Carmichael estimates net debt to equity stands at just below 20% for FY12. This is down from around 30% previously.
Having factored in revised earnings guidance and the GIS acquisition, DJ Carmichael has reduced the multiple discount it ascribes to Global Construction Services to 10% from 20% previously. This supports an increase in price target to $2.10 from $2.05.
Given the revised price target implies around 17% upside from current levels, DJ Carmichael rates Global Construction Services as a Buy. This positive view is supported by a forecast FY12 earnings multiple of less than 10 times and a prospective fully franked yield of 5.0%.
There is little basis for comparison as the FNArena database shows no coverage of Global Construction Services, which likely reflects a market capitalisation at present of just more than $160 million.
Shares in Global Construction Services today are weaker and as at 11.35am the stock was down 5c at $1.61. Over the past year the stock has traded in a range of $0.80 to $1.93.