PGX has developed a market leading reputation Primed for growth … · 2020. 6. 4. · Canaccord...

Primero Group Limited

Engineering and Construction

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and allthe companies and securities that are the subject of this report discussed herein.

3 August 2018

BUYPRICE TARGET A$0.59Price (2-Aug)Ticker

A$0.41PGX-ASX

52-Week Range (A$): 0.37 - 0.45Avg Daily Vol (M) : 0.1Market Cap (A$M): 59.8Shares Out. (M) : 144.1Enterprise Value (A$M): 32.1Cash (A$M): 6.0Long-Term Debt (A$M): 1.3

FYE Jun 2017A 2018E 2019E 2020ESales (A$M) 52.3 79.9 111.3 119.3EBITDA (A$M) 2.6 8.0 10.2 10.7Net Income (A$M) 1.2 4.7 6.4 6.7

EPS (A$) 1.2 5.0 4.5 4.6DPS (A$) 0.00 0.00 1.50 1.50EV/EBITDA (x) 23.8 6.9 3.1 2.7P/E (x) 33.3 8.3 9.3 9.0

0.44

0.43

0.42

0.41

0.4

0.39

0.38

0.37

Au

g-1

8

PGX

Source: FactSet

Priced as of close of business 2 August 2018

Canaccord Genuity (Australia) Limited has received a fee asLead Manager and Underwriter to the Primero Group LimitedInitial Public Offer in July 2018.

Cameron Bell | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.3.8688.9152

Initiation of Coverage

Primed for growthWe initiate coverage of Primero Group (PGX) with a BUY rating and a A$0.59 price target.PGX is an engineering company that focuses on designing, constructing and operatingservices for the mining and energy sectors. The company was floated on the ASX in July2018 at a price of $0.40 in a transaction that involved a $20m equity raise and $5m sell-down, with existing shareholders still holding ~56% of the company. We view PGX veryfavourably for several reasons including:Leading position in niche markets: PGX has developed a market leading reputationwithin highly specialised growth areas such as battery materials and smart powerimplementation.Impressive track record: The company has an impressive track record of earnings growthdespite being founded just a few months before the top of the last mining investmentcycle. Despite a consistently declining market, PGX has grown since its inception in 2011to >300 employees and has guided to FY18 revenue of ~$80m. We are excited by PGX'sgrowth potential particularly now that the mining investment cycle appears to be in theearly stages of recovery.Leveraged to growing battery materials sector: PGX has an enviable status within thebattery materials sector due to its level of experience and success on projects involvinglithium, cobalt, tantalum and rare earths. We see substantial opportunities for work withinthe sector for PGX, which is supported by our estimated 15% CAGR in lithium demand to2025 and 9% CAGR in cobalt demand.Energy growth potential: The company recently signed a $56m contract with global powergeneration company Wärtsilä to install a 211MW smart power generation power plantfor AGL. We believe AGL plans an additional 750MW of flexible gas capacity and noteWärtsilä's high level of confidence in securing the contracts for this. Provided PGX executesthe current contract successfully, we believe there is potential to partner with Wärtsilä onthe remainder of the work which we estimate could be worth up to ~$200m.The return of iron ore capex: In the last three months, the three major ASX listed ironore companies (RIO, FMG and BHP) have announced a combined A$13.5b of capitalexpenditure to be invested over the next three years within the Pilbara region of WesternAustralia. We believe PGX is well positioned to win NPI work and note that it has existingrelationships with each of the three mentioned iron ore majors.Expanded balance sheet capacity: PGX raised $20m of new equity as part of its IPO,which we believe will allow the company to tender for larger projects in the future, openingup new potential growth areas.Tender pipeline: PGX has tender opportunities worth $600m and historic win rate of 40%,implying a risk weighted pipeline of $240m compared to our FY18 revenue forecast of$80m. We expect contract wins to provide positive catalysts for the share price.

Valuation and recommendationOn an FY19 EV/EBIT of just 3.5x, PGX currently trades at a 62% discount to the ASX listedmining services median. We expect the multiple to rerate towards 5-6x in the near term,as the company continues to deliver on expectations. Our $0.59 price target is based on ablend of DCF, FY19 PE multiple and FY19 EV/EBIT multiple, and it implies a potential TSRof 47%. We initiate with a BUY rating.

For important information, please see the Important Disclosures beginning on page 22 of this document.

Source: Company data, Canaccord Genuity estimates

FINANCIAL SUMMARY

Primero Limited PGX:ASX

Analyst: Cameron Bell Rating: Buy

Date: 3/08/2018 59.8 Target Price: 0.59$

Year end: 30 June

Profit & Loss (A$m) 2017A 2018F 2019F 2020F Valuation ratios 2017A 2018F 2019F 2020F

Sales Revenue 52.1 79.9 111.3 119.3 EPS 1.2 5.0 4.5 4.6

EBITDA 2.6 8.0 10.2 10.7 P/E (x) 33.3 8.3 9.3 9.0

Depreciation -0.6 -0.8 -1.0 -1.1 PER Rel - All Ords. 112% -42% -33% -34%

EBITA 2.1 7.2 9.2 9.6 PER Rel - Small Ind. 82% -46% -32% -28%

Amortisation 0.0 0.0 0.0 0.0 Enterprise Value ($m) 62.7 55.1 32.1 28.5

EBIT 2.1 7.2 9.2 9.6 EV / EBITDA (x) 23.8 6.9 3.1 2.7

Net Interest Expense -0.4 -0.2 -0.1 -0.1 EV / EBIT (x) 30.3 7.7 3.5 3.0

NPBT 1.7 7.0 9.2 9.5 DPS (AU$ cps) 0.0 0.0 1.5 1.5

Tax expense -0.5 -2.3 -2.8 -2.9 Dividend Yield (%) 0.0% 0.0% 3.6% 3.6%

NPAT (Normalised) 1.2 4.7 6.4 6.7 Franking (%) 100% 100% 100% 100%

NPATA (Normalised) 1.2 4.7 6.4 6.7 CFPS (cps) -0.2 9.9 4.0 4.9

Signif icant items 0.0 -0.4 -0.6 0.0 P / CFPS (x) -182.5 4.2 10.2 8.4

NPAT (Reported) 1.2 4.3 5.8 6.7

Cash Flow 2017A 2018F 2019F 2020F Profitability ratios 2017A 2018F 2019F 2020F

Operating EBITDA 2.6 8.0 10.2 10.7 EBITDA Margin (%) 5.0 10.0 9.2 9.0

- Interest & Tax Paid -0.7 -1.0 -2.8 -2.9 EBIT Margin (%) 4.0 9.0 8.3 8.0

+/- change in Work. Cap. -3.3 1.7 -1.6 -0.7 ROE (%) 31.5 47.1 18.3 16.6

- other 1.2 0.6 0.0 0.0 ROA (%) 6.7 15.9 10.9 10.3

Operating Cashflow -0.2 9.3 5.8 7.1 ROIC (%) 22.1 97.3 88.0 77.1

- Capex -1.6 -0.9 -1.6 -1.8

- Aquisitions/divestments 0.0 0.0 0.0 0.0 Balance Sheet ratios 2017A 2018F 2019F 2020F

- other 0.1 0.1 0.0 0.0 Net Debt (cash) 2.9 -4.7 -27.7 -31.3

Free Cashflow -1.7 8.5 4.2 5.3 Net Gearing (ND/E%) 78.7% -47.1% -78.7% -78.0%

- Ord Dividends -0.1 -0.6 -0.5 -1.7 Interest Cover (x) 5.4 41.3 142.3 147.5

- Equity /other 0.2 0.0 19.2 0.0 ND/EBITDA (x) 1.1 -0.6 -2.7 -2.9

Net Cashflow -1.6 7.9 22.9 3.6 NTA per share (AU$) 0.04 0.11 0.37 0.28

Cash at beginning of period 1.6 -0.3 6.0 29.0 Price / NTA (x) 10.5 3.9 1.1 1.5

+/- borrow ings / other -0.2 -1.6 0.0 0.0 EFPOWA (m) 94.1 94.1 144.1 144.1

Cash at end of period -0.3 6.0 29.0 32.6

Growth ratios 2017A 2018F 2019F 2020F

Balance Sheet 2017A 2018F 2019F 2020F Sales revenue ($m) 58.3% 53.3% 39.3% 7.1%

Cash 0.0 6.0 29.0 32.6 EBITDA ($m) 14.4% 204.2% 27.6% 4.9%

Inventories 0.6 0.8 1.0 1.0 EBIT ($m) 17.4% 247.2% 28.7% 3.7%

Debtors 5.9 12.0 17.3 19.1 NPAT ($m) 18.5% 303.1% 35.9% 3.7%

PPE 3.2 3.3 3.9 4.6 Adj EPS (cps) n/a 303.1% -11.2% 3.7%

Intangibles 0.1 0.1 0.1 0.1 DPS (cps) n/a n/a n/a 0%

Other assets 7.5 7.5 7.5 7.5

Total Assets 17.3 29.7 58.7 64.8 Interim Analysis 1H17A 2H17A 1H18A 2H18F

Borrow ings 2.9 1.3 1.3 1.3 Revenues 29.6 52.2 41.2 38.8

Trade Creditors 7.1 12.8 16.7 17.8 EBITDA 2.1 0.5 4.0 4.0

Other Liabilities 1.5 1.2 1.2 1.2 EBITDA margin (%) 7.3% 0.9% 9.8% 10.2%

Total Liabilities 13.7 19.8 23.7 24.7 EPS 1.2 0.0 2.6 2.4

NET ASSETS 3.6 9.9 35.0 40.0 DPS 1.0 1.0 1.3 1.3

Board of Directors / Substantial Shareholders Valuation

Board of Directors Shareholding % Normalised EBIT multiple (x)

Mark Connelly - Non-Executive Chairman 0.0 0.0% EBIT ($m) 9.2

Cameron Henry - Managing Director 23.7 16.5% Target EBIT multiple (x) 6.0

Dean Ercegovic - Executive Director 18.7 13.0% Net Debt (cash) ($m) -27.7

Brett Grosvenor - Executive Director 9.0 6.3% Implied Valuation 83.1

Luke Graham - Non-Executive Director 0.0 0.0% Per Share (AU$) 0.58

Major Shareholders Shareholding % Target PE Multiple

Cameron Henry - Managing Director 23.7 16.5% Adjusted EPS (c) 4.5

Dean Ercegovic - Executive Director 18.7 13.0% PE Target (x) 12.5

Brett Grosvenor - Executive Director 9.0 6.3% Per Share (AU$) 0.56

Top 20 Shareholders 129.1 89.6% Discounted Cash Flow

Cost of equity 12.0% WACC 10.4%

Description Cost of debt 5.5% Terminal Grow th Rate 2.5%

Net Debt/ Net debt + equity 20.0% Per Share (AU$) 0.65$

0.59$

Primero (ASX:PGX) is an engineering company that specialises in the design, construction and

operational services w ith a focus on the minerals, energy and non-process infrastructure segments.

Primero Group LimitedInitiation of Coverage

Buy Target Price A$0.59 | 3 August 2018 Engineering and Construction 2

Investment Case

We initiate coverage of Primero (ASX:PGX) with a BUY rating and A$0.59 price target.

Primero is an engineering and contracting company that focuses on designing,

constructing and operating services for the mining and energy sectors. The company

was founded in 2011 and has established a track record of success, a long list of strong

client relationships and well-renowned level of expertise in its focus areas such as

battery minerals.

The company listed on the ASX in July 2018, following the issuing of an additional 50m

shares at $0.40 each. New equity of $20m was raised, in addition to a $5m sell-down

from employees. The primary reason for the listing was to remove capital constraints

that had limited earnings growth and restricted the company from tendering for some

larger projects. However, even with these capital constraints, the company has

experienced a very high level of earnings growth since its inception, and we are

forecasting ~$80m revenue and $8m pro-forma EBITDA in FY18.

The underlying driver of PGX’s target industries is the demand and supply of

commodities including gold, iron ore, oil, gas, lithium, cobalt etc. Having grown rapidly

since being founded, the company has three large earnings drivers in the short term in

our view:

1. Increasing battery materials

2. Iron ore capital expenditure cycle

3. Power plant construction

Growing battery materials sector

PGX has developed an enviable track record within the battery materials sector, at a

time of rapid growth in demand for commodities such as lithium, cobalt, tantalum and

rare earths. We believe the sector will provide substantial growth opportunities for PGX

over several years and highlight our forecast 15% CAGR in lithium demand to 2025 and

9% CAGR in cobalt demand.

Figure 1: Mine production of lithium by source Figure 2: Forecast lithium demand

Source: Canaccord Genuity estimates Source: Canaccord Genuity estimates



Figure 3: Forecast cobalt demand (2017-2025) Figure 4: Forecast EV sales (2017-2025)

Source: Company Reports, Canaccord Genuity estimates Source: Company Reports, EV-volumes.com, EVobsession.com, Canaccord

Genuity estimates

Figure 5: Batteries - GWh delivered pa Figure 6: 100% EV’s by 2050 scenario

Source: Avicenne.com, Canaccord Genuity estimates Source: Global Insight, Canaccord Genuity estimates

We note near-term potential targets customers with upcoming projects include

Piedmont Lithium (PLL:ASX), Core Exploration (CXO:ASX), Sigma Lithium (SGMA.V) and

Savannah Resources (SAV:AIM).

Energy growth potential

PGX has successfully executed pipeline and power contracts that have led to a strong

reputation in the sector, and also to the recent winning of a $56m contract installing

smart power generation with partner, Wärtsilä. Wärtsilä (FI:WRT1V) is a global power

generation company and energy solutions company based in Finland, with an €11b

market capitalisation, that recently won its most substantial contract in Australia, when

it announced it would deliver a 211MW Smart Power Generation power plant for AGL.

PGX was chosen by Wärtsilä as a subcontractor to perform the design, construct and

commissioning of the power plant.



The flexibility of its power plants is a key enabler for utilities in an electricity market with

a high share of renewables. The power plant is expected to improve the reliability and

security of supply in South Australia, and Wärtsilä was keen to highlight that AGL is

planning to replace the Liddell coal plant with renewables and an additional 750MW of

flexible gas capacity.

Wärtsilä hosted an investor day in May 2018 at which management discussed AGL’s

plans in Australia and stated:

“They are going to start renewables plus 750 megawatts of flexible gas. Guess who

is going to install it.”

At present, PGX (and Wärtsilä) have only the one contract with AGL; however we believe

that if the project runs according to plan, there is potentially a substantial amount of

additional work to follow, as noted by the comment above.

If we were to take the simplistic approach of assuming the same revenue per MW on

the 750MW potential future work as the current 211MW project, the implied revenue

value to Primero of the future possible work is $199m, compared to the forecast group

revenue in FY18 of ~$80m.

Strong niche operator with a competitive advantage

PGX has developed a strong reputation across several sectors. This is based on an

enviable track record and an ever-growing relationship.

PGX was initially established with the strategy of targeting smaller projects that didn’t

received a particularly high level of service from the engineering community as other

larger projects took priority. This has led to two important outcomes for PGX:

1. PGX team has developed strong track records in commodity segments that were

previously considered speculative. Historically, these projects were generally with

smaller companies; however, an improvement in underlying fundamentals

supported those companies and projects becoming much larger and has assisted

in PGX become a leading voice in certain speciality areas. PGX has since

leveraged off its impressive reputation to expand in other industries.

2. Supporting smaller companies in the early stages of development has led to

strong and enduring client relationships. This has created repeat work, whilst

also generating new business leads.

To illustrate this success of PGX’s strategy to date, we note that mining capex in Western

Australia peaked in the September quarter of 2012, roughly one year after PGX first

opened its doors (see Figure 17). Despite operating in a declining market since then,

the company has managed to grow to have over 300 employees and forecast FY18

revenue of ~$80m.

Exposure to the resurgence in iron ore capex

We believe that PGX is well positioned to win work associated with non-process

infrastructure at iron ore mine sites in Western Australia. Following a period of

underinvestment by the major Australian iron ore miners, we believe we are entering a

period of renewed capital expenditure.



CY19-CY21 appears likely to see a substantial amount of replacement capex in addition

to the ongoing base level of capex in Western Australia. Assessing the financials of the

two largest iron ore miners in Western Australia (BHP and RIO) creates a clearer picture

of the potential scale and likelihood of increasing investment.

Figure 7: RIO has 77% lower net debt than four years ago, BHP has reduced its net debt

by 38% (not including the recent shale gas sale which generated US$10.8b). Both these

large reductions support the possibility of increased investment.

Source: Canaccord, FactSet

Figure 8: FCF (A$m) for both RIO and BHP has improved a lot in recent periods,

supporting potential future increased investment


$0

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RIO Free Cash Flow BHP Free Cash Flow



Since PGX completed the transactional phase of the IPO process, BHP, Rio Tinto and

Fortescue have each provided updates. PGX has previously provided NPI services to all

three.

BHP: Has approved the South Flank where the capex required is US$3.4b

(A$4.6b), of which BHP’s share is US$2.9b (A$3.9b). First ore from South Flank

is expected to be produced in 2021.

RIO: Has approved Koodaideri mine, which forms part of its Pilbara replacement

mines. Related capex in 2018–2020 is estimated at ~US$2.2b (A$3.0) and

includes West Angelas, Robe Valley and the Koodaideri development from 2019.

RIO also guided to sustaining capex in iron ore of ~US$1b (A$1.4) per annum for

the next three years.

FMG: Has announced its new iron ore mine in the Pilbara, Eliwana. It is forecast

to US$1.3b (A$1.7b) and first ore is expected in 2020.

Combined, these three updates highlighted A$13.5b to be invested over the next three

years within the Pilbara, of which A$9.3b was newly announced investment. The three

updates were all provided between May 28 and June 18, 2018.

Figure 9: BHP’s capex (US$m) appears to have bottomed, and an additional ~A$14.6b

was recently generated by the sale of its US shale assets


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Figure 10: RIO’s capex (US$m) has also bottomed, and an additional A$5.3b was

recently generated by the sale of coal assets


Figure 11: Consensus capex (US$m) estimates reflect increasing investment


Attractively valued

Based on our currently estimates, we think PGX offers exceptional value.

On an FY19 EV/EBIT of just 3.5x, PGX is trading 62% below the median of the broader

mining services sector. We believe GR Engineering (ASX:GNG) and Lycopodium

(ASX:LYL) represent PGX’s two closest comps on the ASX and we note the respective

FY19 EV/EBIT multiples of 6.3x and 5.2x. We expect PGX to grow noticeably faster and

expect a gradual rerate of multiple. Should PGX trade on 6x FY19 EBIT, that would

equate to a share price of $0.58 per share, 39% higher than the current share price.

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BHP RIO



Catalysts

We see the most likely catalysts as:

Contract wins: We view this as the most likely in the short term PGX recently

highlighted tender opportunities in the order of ~$600m over the next two years.

In addition, the company flagged a historic win rate of 40%, which translates to

a risk weighted tender book of $240m, on the base of the ~$80m revenue guided

to in FY18.

FY18 results and outlook: We see minimal risk to prospectus forecasts and

expect the result and commentary to provide greater confidence for prospects in

FY19 and beyond.

Asset investments: We view this as a potential longer-term strategy, that would

see PGX take an equity stake in a potential project.

Valuation and Recommendation

We initiate coverage of PGX with a BUY rating and a $0.59 price target, which is based

on a blend of DCF, FY19E PE multiple and FY19E EV/EBIT multiple. Our price target

implies a total shareholder return of 47%.



Company Introduction

Background

Primero Group (ASX:PGX) was founded in 2011 and is based in Perth. PGX provides

engineering, advisory, construction and operational services to the resources and

energy sectors. The company has experienced significant growth since 2011 and now

has offices in Perth, Bibra Lake, Port Hedland and Montreal, Canada. The team has

increased to ~120 full time staff in addition to ~200 directly employed site construction

personnel and subcontractors.

The group was established with the strategy of targeting smaller projects that flew under

the radar of some of PGX’s larger competitors. PGX has an integrated service offering

that intends to take a specific project through from study, design, construct and

eventually operate.

Once a study etc has been completed, the project may or may not progress. The two

types of contracts that are common within mining engineering at the project execution

stage are EPC and EPCM. EPC stands for Engineer, Procure and Construct while EPCM

stands for Engineer, Procure and Construction Management (EPCM). An EPCM contract

sees the engineering company paid to manage the project, and the engineer then pays

subcontractors and suppliers and doesn’t take on the risk. For this reason, EPCM

contracts often generate a lower margins compared to EPC.

EPCM generates revenue based on an hourly fee, whereas EPC are generally more fixed

cost and can range from a simple lump sum, to a form of cost over/run shares.

Figure 12: PGX aims to be involved for the complete project life cycle.

Source: Company reports



PGX groups its services into three key types:

Design: services include a wide range of engineering advisory services such as

front end engineering design (FEED), feasibility studies, fabrication, procurement,

mineral process modelling etc.

Construct: PGX offers complete turn-key solutions for civil and structural,

mechanical and piping, electrical and instrumentation etc. This includes

construction plants, tools and equipment such as trucks and excavators etc.

Operate: PGX is expanding the more stable revenue stream related to the ongoing

operating and maintenance of a project.

PGX also groups its business into three key industry sectors:

Minerals: PGX provides a variety of services to companies across a broad range

of commodities; however, it has developed an industry-leading reputation within

the battery materials sector. Key clients include Galaxy Resources, Tawana

Resources, Pilbara Minerals and Resolute Mining. Typical projects range in size

from $1m to $200m total capital expenditure.

Energy: Services include pressure reduction, metering, compression and the

development of gas and diesel power generation facilities. Key clients include

Wärtsilä, APA Group, Quadrant Energy, DBP and Vermilion. Projects vary from

engineering and design through to fabrication and installation up to the value of

A$100m.

Non-process Infrastructure: NPI refers to the bulk of construction that needs to

occur at a mine site, excluding the processing infrastructure, e.g. workshops,

maintenance facilities, wash bays etc. The bulk of work that PGX has won to date

has involved the larger iron ore companies. Key clients include Rio Tinto, BHP,

Fortescue, Newcrest and Citic.

Figure 13: PGX FY18E revenue split by segment Figure 14: FY19 forecast revenue split by segment

Source: Company reports, Canaccord Genuity Source: Company reports, Canaccord Genuity estimates

11.0%

81.3%

7.7%

NPI

Minerals

Energy

27.5%

35.7%

36.8%NPI

Minerals

Energy



The engineering and construction industries have benefitted from an improvement in

commodity markets recently, which in turn has also driven improved access to equity

capital funding for future commodity related projects.

Figure 15: The last several years saw consistently declining commodities prices until

early 2016. Since January 1, 2016, prices for gold (+15%), coal (31%), iron ore (+71%)

and copper (+18%) have risen.

Source: FactSet, Canaccord Genuity

Figure 16: Equity raisings by mining companies continue to gradually trend higher,

which supports ongoing investment in future expansion projects

Source: S&P Global Market Intelligence, Canaccord Genuity, Company reports

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Figure 17: Quarterly mining capex $m in Western Australia: We are late in an extended

downturn in the capex cycle, and note the improving level of equity raisings combined

with recent announcements from iron ore majors including BHP, RIO and FMG. The lack

of investment resulted in less work, staffing reductions and aggressive pricing. Although

these risks are still around, we are gradually seeing an improvement in operating

conditions as well as outlook.

Source: Australian Government, Canaccord Genuity

Figure 18: $m in quarterly exploration: A period of underinvestment in commodities

exploration has developed since a peak in exploration spend in 2012. Iron ore appears

set to rebound and recent increases in gold, nickel and cobalt exploration bodes well

for potential new target contracts.

Source: Australian Government, Canaccord Genuity

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r–1

8

Copper Gold Iron ore

Mineral sands Nickel, cobalt Silver, lead and zinc



Financials

Income statement

PGX generates revenue from the provision of engineering and construction services.

Revenue is essentially booked as a percentage of project completion using a best

estimate of timing of costs and completion date. Revenue from performance bonuses

are also recognised once the performance target has been achieved.

In addition, there is also a small aspect of group revenue that involves risk weighing

tenders and new contracts based on the stage of the tender process and likelihood of

winning. Revenue from tenders make up 2% of the total forecast revenue for FY18.

Primary expenses for PGX include staff/labour and materials. Given only limited

tangible assets, there is little depreciation expense.

Figure 19: PGX’s historical and forecast revenue ($M) and margins

Source: Company reports, Canaccord Genuity estimates

PGX provided prospectus forecasts for FY18, but not FY19. Given the prospectus was

lodged with ASIC in early June, we see little risk to prospectus forecasts and our FY18

estimates are in line with prospectus numbers. We note that at the time of the

prospectus, 98% of FY18 revenue was either booked or contracted.

Looking further forward, we note some commentary provided by the company. At the

time of the prospectus, PGX had contracted revenue for $67m in FY19. In addition, the

company has guided towards EBITDA margins in the range of 8-10% for FY19, which is

slightly below FY18. We have EBITDA margins declining from 10.0% in FY18 to 9.2% in

FY19 and trending towards 8% in following years.

PGX intends to pay out 40-60% of NPAT as dividends in FY19. We have assumed 40%

in the longer term.

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2014 2015 2016 2017 2018F 2019F 2020F

Revenue GP margin % EBIT margin %



Figure 20: PGX’s income statement

FY17 FY18F % ∆ FY19F FY20F

REVENUE

Minerals 6.6 65.0 881% 40.8 45.7

Non-process Infrastructure 10.8 8.8 -19% 24.2 46.7

Energy 34.6 6.2 -82% 46.3 27.0

Total Revenue 52.1 79.9 53% 111.3 119.3

Direct costs of providing services 46.6 67.1 44% 94.5 101.4

Gross Profit 5.5 12.9 133% 16.8 17.9

EBITDA 2.6 8.0 204% 10.2 10.7

EBITDA margin 5.1% 10.0% 5.0% 9.2% 9.0%

EBIT 2.1 7.2 247% 9.2 9.6

Reported NPAT 1.2 4.3 266% 5.8 6.7

Underlying NPAT 1.2 4.7 303% 6.4 6.7

EPS (¢) 1.2 5.0 303% 4.5 4.6

DPS (¢) 0.0 0.0 NA 1.5 1.5


Given large contracts can drop in and out of the order book, revenue tends to be lumpy

for smaller engineering groups, as does cash flow.

Figure 21: PGX’s largest current contracts

Project Client Commodity Location Size Start Concludes

Barker Inlet Power station AGL/Wartsila Power SA $56m 2018 Sept 2019

Bald Hill – ops & maintenance Tawana Lithium WA $18m 2018 Feb 2020

Marandoo RIO Iron Ore WA $13.2m 2018 Feb 2019


Figure 22: FY17 revenue by commodity Figure 23: FY18F revenue by commodity

Source: Company reports, Canaccord Genuity Source: Company reports, Canaccord Genuity estimates

16.0%

50.0%

18.0%

8.0%7.0%

Gold

Iron ore

Lithium

Oil and Gas

Other

5.0%

6.0%

62.0%

4.0%

22.0% Gold

Iron ore

Lithium

Oil and Gas

Other



Earnings growth drivers

PGX is expected to generate earnings growth from several sources:

Geographical expansion: PGX recently opened an office in Montreal, Canada that

has already seen several notable wins.

Increased project size: the increased balance sheet strength gained from the IPO

equity raise means that PGX is now in a position where it can tender for larger

contracts.

Growing battery materials sector: global lithium production and consumption is

forecast to grow dramatically over the next decade and beyond.

Increasing capex in iron ore: Investment into reserves in Western Australia is

expected to increase in the short-medium term with RIO, BHP and FMG all

recently committing to increased spending.

Power generation: The instability of solar and wind power means there is a

necessity for off-the-grid-stabilising flexible power generation, and PGX has

partnered with Wärtsilä to deliver its first major Australian installation, which

could lead to more contracts of a similar nature.

Strategic acquisitions: The ASX listing increases PGX’s flexibility and ability to

make acquisitions if the need or desire every arises.

Becoming a partner in an asset: We believe that PGX will occasionally have an

option to take a stake in a project in lieu of fees. We see this as a potential future

growth avenue.

Cashflow

Given the lumpy nature around the timing of cash receipts combined with the growth

trajectory of the company, we have taken a cautious approach around PGX’s cash flow

and have assumed working capital outflows for the next few years in addition to

increased capex.

Figure 24: PGX’s cashflow statement

FY17 FY18F FY19F FY20F

Operating EBITDA 2.6 8.0 10.2 10.7

- Interest & Tax Paid -0.7 -1.0 -2.8 -2.9

+/- change in Work. Cap. -3.3 1.7 -1.6 -0.7

Operating Cashflow -0.2 9.3 5.8 7.1

- Capex -1.6 -0.9 -1.6 -1.8

Free Cashflow -1.7 8.5 4.2 5.3

- Ord Dividends -0.1 -0.6 -0.5 -1.7

- Equity /other 0.2 0.0 19.2 0.0

Net Cashflow -1.6 7.9 22.9 3.6

Cash at beginning of period 1.6 -0.3 6.0 29.0

Cash at end of period -0.3 6.0 29.0 32.6




Balance sheet

The last several years has seen a growing preference for EPC-style contracts from

companies within the commodities industry. PGX has been active in this segment;

however, balance sheet strength is required given the fixed-price nature and, therefore,

the scale of target contracts has been slightly restricted for PGX. The newly raised equity

should assist in targeting larger contracts.

Figure 25: PGX’s balance sheet

2016 2017 2018F 2019F 2020F

Total Current Assets 9 14 26 55 60

PP&E 3.2 3.3 3.9 4.6 5.1

Goodwill & Intangibles 0 0 0 0 0

TOTAL Assets 11 17 30 59 65

Borrowings 7 12 1 1 1

Other Liabilities 1 2 18 22 23

TOTAL Liabilities 8 14 20 24 25

NET ASSETS 2 4 10 35 40

Contributed Equity 0 0 0 20 20


Figure 26: PGX’s balance sheet metrics & return metrics

2016 2017 2018F 2019F 2020F

ND 0.3 2.9 -4.7 -27.7 -31.3

ND/E 13% 78.7% -47.1% -78.7% -78.0%

ND/(ND+E) 12% 44.1% -89.0% -369.1% -354.2%

ND/EBITDA 0.1 1.1 -0.6 -2.7 -2.9

EBITDA/Interest 6.5 6.8 46.0 157.3 165.0

adj ROE 39.9% 31.5% 47.1% 18.3% 16.6%

adj ROA 9.1% 6.7% 15.9% 10.9% 10.3%




Valuation

We value PGX at $0.59 per share and base our valuation on a blend of a discounted

cash flow model, an EV/EBIT multiple and a PE.

Discounted cash flow: Our DCF generates a valuation of $0.64 per share. It

assumes a terminal growth rate of 2.5%, an equity beta of 1.4, a cost of debt

of 5.5%, and risk-free rate of 5.0% and a weighted average cost of capital of

10.4%.

Price to earnings multiple: We have a PE based valuation of $0.56 per share.

We use a forward PE multiple of 12.5x and base the valuation on our FY19 EPS

of 4.5c. 12.5x is marginally ahead of the industry median and below the

industry average. WE believe its justified given the strong growth trajectory of

the company.

EV/EBIT multiple: Our normalised EBIT multiple valuation values the company

at $0.58 per share. We use a 6.0x FY19 EV/EBIT multiple which compares to

its two closest ASX comps (GNG and LYL) that trade on 6.4x and 5.2x

respectively. At 6x, the stock is still at a 34% discount to its broader mining

services peers.

At the current share price, the stock is trading on an FY19 PE of 9.2x, an EV/EBITDA of

3.1x and an EV/EBIT of just 3.4x.

Our $0.59 valuation equates to a FY19 PE of 13.3x, an EV/EBITDA of 5.7x and an

EV/EBIT of 6.2x.

Industry comparison

We believe that mining services company valuations are best compared on forward

EV/EBIT multiples given the varying levels of capital intensity and balance sheet

structures. On this basis, our FY19 EV/EBIT of 3.4x is currently 63% below the industry

median, as listed in Figure 27 below. The FY19 PE of 9.2x reflects a 24% discount to

the median of ASX listed mining services stocks.

We also note the long history of M&A within the sector and highlight the closes

comparable company that was acquired recently, Sedgman. We estimate Sedgman was

acquired on 6.2x forward EBIT and note that Clough was acquired on 7.6x.



Figure 27: PGX is trading on a ~62% discount to ASX listed contractor peers on an FY19 EV/EBIT basis. GNG and LYL are PGX’s closest comps in our view.

Company Name Mkt Cap (A$m)

FY18 EV/EBITDA

FY19 EV/EBITDA

FY18 EV/EBIT

FY19 EV/EBIT

FY18 P/E FY19 P/E FY18 FCF

Yield FY19 FCF

Yield FY18

ND/EBITDA FY18 ND/E

ALS 4,159 NA 13.6 NA 17.4 NA 24.2 3.6% 4.3% 1.5 38%

Ausdrill 656 5.5 4.5 10.0 7.6 13.7 9.8 -8.1% 5.0% 1.0 28%

Austin Engineering 122 7.1 5.8 12.9 9.3 17.4 10.8 NA NA 1.7 34%

Cardno Limited 603 10.3 8.9 13.0 10.6 NM 14.0 3.5% 4.8% 0.1 1%

CIMIC Group 15,613 8.6 8.2 12.7 12.2 20.2 19.4 4.0% 4.3% -0.8 -39%

Decmil Group 165 NA 7.1 NA 9.2 NA 14.6 -5.0% 2.7% -1.1 -4%

Downer EDI 4,358 7.2 6.7 13.1 11.4 16.2 14.2 7.8% 6.8% 1.1 27%

Emeco Holdings 1,039 9.3 7.3 18.5 14.2 31.8 18.9 2.7% 2.5% 2.4 742%

GR Engineering 203 6.8 5.9 7.4 6.3 13.6 11.8 5.6% 5.9% -1.6 -64%

Imdex 410 10.9 9.0 16.1 12.8 21.3 17.7 1.2% 6.2% -0.4 -10%

Lycopodium 171 4.4 4.6 5.0 5.2 10.6 12.2 3.9% 9.6% -4.1 -106%

MACA Limited 336 3.3 3.0 7.6 7.0 13.2 13.2 -8.5% 12.5% -0.9 -24%

Macmahon 514 3.8 2.8 10.4 6.1 12.6 8.0 -12.2% 8.7% 0.1 2%

Matrix Composites 45 NM NM NM NM NM NM -12.9% -16.0% 1.3 -8%

Mineral Resources 3,162 6.3 5.4 8.7 7.3 12.6 10.1 3.7% 6.5% 0.1 2%

Mitchell Services 75 NA NA NA NA NA NA NA NA NA NA

Monadelphous 1,381 9.9 9.6 11.6 11.4 19.0 18.7 3.0% 5.3% -1.8 -56%

NRW Holdings 637 7.4 5.4 14.2 8.9 20.8 12.7 5.9% 5.2% 0.4 16%

Pacific Energy 249 6.3 5.0 10.3 7.9 13.3 11.2 5.1% 7.6% 2.1 65%

RCR Tomlinson 463 5.1 3.8 7.1 5.0 11.8 8.4 5.9% 6.7% -1.0 -19%

RPMGlobal 129 NA NA NA NA NA NA NA NA NA NA

Seven Group 6,139 13.2 10.5 18.0 14.5 18.9 16.1 4.2% 6.5% 3.0 72%

SCEE 164 NA NA NA NA NA NA NA NA NA NA

SRG Limited 141 7.0 2.5 10.6 3.2 13.9 9.0 -6.1% 11.3% 0.2 4%

Swick 56 NA NA NA NA NA NA NA NA NA NA

Tempo Australia 39 13.2 9.3 19.6 11.9 38.9 21.9 NA NA 0.0 NA

Valmec 37 6.4 6.0 7.2 7.3 6.8 6.4 -10.7% 11.5% -0.7 -24%

Veris 81 8.9 5.4 26.3 11.1 19.6 9.8 1.1% 12.0% 0.5 7%

Watpac 139 NM NM 14.5 NM NM 10.9 0.8% 8.8% -64.1 -115%

WorleyParsons 5,032 14.9 13.2 18.8 16.3 27.8 23.8 3.4% 4.6% 1.9 34%

XRF Scientific 23 6.8 5.4 9.1 6.8 12.1 8.9 0.9% 7.9% 0.1 1%

Average 1,406 7.9 6.5 12.6 9.3 17.6 13.3 0.0% 6.1% -2.3 23%

Median 226 7.1 5.9 12.1 9.0 15.1 12.2 2.8% 6.5% 0.1 1%

Primero 60 6.9 3.1 7.7 3.5 8.3 9.3 14.2% 7.1% -0.6 -47%

% vs median -73% -4% -46% -37% -62% -45% -23% 403% 9%

Source: Company reports, Canaccord Genuity estimates, Capital IQ (Market cap, multiples and yields are based on closing prices on August 2nd 2018)



Appendix 1: Board & Management

Shareholders prior to the IPO have entered into escrow arrangements whereby 50% of

the ~81m escrowed shares will come out of escrow when the FY19 results (August

2019) are released and the other 50% will be released in July 2020. 43.8% of the

shares on issue are held by new shareholders that came on to the register as part of

the IPO.

Mr. Cameron Henry (Managing Director)

Mr Henry is a founder of PGX and has over 15 years’ experience in both technical and

managerial roles within the engineering industry. He has been responsible for the

strategic direction and development of the business. He is currently a non-executive

director of Titan Minerals (ASX:TTM), is a member of the Australian Institute of Company

Directors and previously worked for a Perth based engineering group.

Mr. Mark Connelly (Non-Executive Chairman)

Mr Connelly is an experienced mining industry executive, having previously been CEO

and MD of Papillon Resources in addition to senior roles with Newmont Mining, Inmet

Mining, Endeavour Mining and Adamus Resources. He is currently Non-Executive

Chairman of West African Resources (ASX:WAF), Calidus Resources (ASX:CAI), TAO

Commodities (ASX:TAO) and Emmerson PLC (AIM:EML).

Mr. Dean Ercegovic (Executive Director)

Mr Ercegovic co-founded PGX and has ~20 years’ experience in project managing ECP

and EPCM contracts in mining and energy. He leads PGX’s operations and is responsible

for the health, safety, environment, quality and support services of the company. Prior

to PGX he worked for Roche Mining and a Perth based engineering group.

Mr. Brett Grosvenor (Executive Director)

Mr Grosvenor joined PGX in 2015 after gaining extensive experience at companies such

as Alstom, Laing O’Rourke, Sinclair Knight Mertz and Alinta Energy. He has over 20

years’ experience in engineering and leads up PGX’s business development.

Mr. Luke Graham (Non-Executive Director)

Mr Graham is an experienced engineer whose career has covered mineral sands, coal,

iron ore, copper, gold and alumina. He is currently the CEO of Strandline Resources

(ASX:STA) and was previously a regional manager at global minerals engineering

company, Sedgman.

Mr. Ryan McFarlane (Chief Financial Officer and Company Secretary)

Mr McFarlane is a Chartered Accountant who has over ten years’ experience in the

business services and taxation industry. He is a graduate of the Institute of Company

Directors and has been CFO since PGX’s incorporation.



Appendix 2: Investment Risks

Risks to our valuation/target price include the following:

Commodity price risk – The demand for services is largely driven by the need for

mining projects, which in turn are dependent on commodity prices. Given this

dependence, the business can be highly cyclical.

Competition – PGX operates in a highly competitive industry, both for potential

contracts and staff.

Fixed price contracts and EPC – A large portion of PGX’s revenue is from fixed-price

contracts, which have inherent risks. Late delivery and cost overruns can create

financial challenges.

Client risk – PGX has a limited number of contracts at any one time, and the

concentrated earnings base means that client risk is amplified.

Pricing and margin risk – This largely relates to fixed-price contracts and the impact

from cost variables such as staffing, and mispricing tenders.

Key personnel – PGX is a services company with key staff that have important client

relationships.

Safety and industrial accidents – PGX is exposed to potential accidents that may

result in injury or deaths.



Appendix: Important DisclosuresAnalyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the authoring analyst in the research.Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons ofCanaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.

Investment RecommendationDate and time of first dissemination: August 03, 2018, 01:27 ETDate and time of production: August 03, 2018, 01:27 ETTarget Price / Valuation Methodology:Primero Group Limited - PGXOur $0.59 price target is based on a blend of DCF, FY19E PE multiple and FY19E EV/EBIT multipleRisks to achieving Target Price / Valuation:Primero Group Limited - PGXRisks to our valuation/target price include the following:Commodity price risk – The demand for services is largely driven by the need for mining projects, which in turn are dependent oncommodity prices. Given this dependence, the business can be highly cyclical.Competition – PGX operates in a highly competitive industry, both for potential contracts and staff.Fixed price contracts and EPC – A large portion of PGX’s revenue is from fixed-price contracts, which have inherent risks. Late deliveryand cost overruns can create financial challenges.Client risk – PGX has a limited number of contracts at any one time, and the concentrated earnings base means that client risk isamplified.Pricing and margin risk – This largely relates to fixed-price contracts and the impact from cost variables such as staffing, and mispricingtenders.Key personnel – PGX is a services company with key staff that have important client relationships.Safety and industrial accidents – PGX is exposed to potential accidents that may result in injury or deaths.

Distribution of Ratings:Global Stock Ratings (as of 08/03/18)Rating Coverage Universe IB Clients

# % %Buy 569 62.46% 44.29%Hold 224 24.59% 26.79%Sell 15 1.65% 26.67%Speculative Buy 103 11.31% 66.02%

911* 100.0%*Total includes stocks that are Under Review

Canaccord Genuity Ratings SystemBUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.

HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.

SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.



NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or therelevant issuer.Risk QualifierSPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock may result in material loss.

12-Month Recommendation History (as of date same as the Global Stock Ratings table)A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication)In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services fromPrimero Group Limited .In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-managerof a public offering of securities of Primero Group Limited or any publicly disclosed offer of securities of Primero Group Limited or in anyrelated derivatives.Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Bankingservices from Primero Group Limited in the next three months.An analyst has visited the material operations of Primero Group Limited. No payment was received for the related travel costs.

Primero Group Limited Rating History as of 08/02/2018AUD0.43

AUD0.42

AUD0.41

AUD0.40

AUD0.39

AUD0.38Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Past performanceIn line with Article 44(4)(b), MiFID II Delegated Regulation, we disclose price performance for the preceding five years or the whole periodfor which the financial instrument has been offered or investment service provided where less than five years. Please note price historyrefers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance.

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PGX has developed a market leading reputation Primed for growth … · 2020. 6. 4. · Canaccord...

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