Each week I’ll be picking a random ASX stock that I’ve rarely seen discussed online that you voted for, for us to dive into for some Due Diligence (“DD”).
This is for us to have a look at what it does, comb over their financials, and conduct some polling on general sentiment. Not all of these stocks may be sexy or appealing; the whole point is to shine a light on what companies are doing out there on the ASX which never get much coverage – for good or bad.
The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week.
Company name: GR Engineering Services
Ticker: GNG
Industry: Industrial Services
Headquarters: Ascot, WA
Market cap: ~$330m
Current share price: ~$2.07
P/E ratio: ~14
1-year Performance: +60.47%
What they do, smoothbrain version: Provide the shovels for the liars standing next to holes, & check whether those holes are lies in the first place.
What they say they do, wanky version: “GR Engineering has a proven track record of delivering integrated project solutions having provided services in over 20 countries for a vast range of precious, bulk and industrial commodities.” 🍆👋
What they do, actual version: Based in Western Australia, GR Engineering Services (GNG) are a mining contracting company who provided a range of services which cover both the ‘front end’ and ‘back end’ of mining projects for clients across a wide array of resource types.
The scope of resources they deal with covers most of the material commodity market that exists across Australia.
This includes all of your favourite Aussie resources from nickel to copper to uranium & more that speccy miners love, as well as less-sexy-but-still-essentials such as iron ore and manganese. One of their fully-owned subsidiaries – Upstream Production Solutions – also covers similar services and maintenance for companies in the oil & gas sector.
Another of their subsidiaries – Mipac – provide specialist monitoring software and technology solutions for resources plants and power stations.
Combine it all together, and if you can dig it out of the ground, then GNG likely provides a service for companies in Australia who deal with it.
In fact if you own a mining company on the ASX, there’s a good chance that GNG may have been involved with them at some point.
There are too many to mention here (as many of them aren’t pictured above), but some of the listed names who are clients include OZ Minerals (OZL), Silver Lake Resources (SLR), Western Areas (WSA), Ramelius (RMS), Ora Banda (OBM), Boss Energy (BOE), Metals X (MLX) and many more.
While they dabble in some overseas projects, the vast majority of GNG’s revenue comes from Australia – around 90%.
The company earns their revenue as a split between both the “advice/consulting” side of the business, as well as the “physical construction” side.
This revenue is then further categorised by sector, broken down between their Mineral Processing and Oil & Gas divisions (about 60/40 as of their most recent report).
On the ‘front-end’ of minerals projects, GNG conduct both PFS (pre-feasibility studies) & DFS (definitive feasibility studies) for prospective mining projects that assess the viability of mineral resources that can lead to the ‘green light’ on such projects going ahead.
In other words, they help do the thorough ‘DD’ required to assess if mining activities will be a waste of time or not.
Tasks such as risk assessment, Life of Mine assessments, implementation & rollout strategies, staffing forecasts and all the other mundane yet essential shit mining companies require are all included within this arm.
In terms of actual mechanics, they have the ability to design & engineer construction in-house as well without outsourcing – covering actual physical aspects of mining projects such as mining site structural builds, mechanics, electrical work and other mixed installations as required.
As a service-based business, the company is reliant on contract wins for servicing individual projects and can thus be prone to spikes in both work & revenue as greater demand for such projects rises and falls.
As a result, GR’s performance as a stock in the past has largely followed wider commodity price bullish and bearish periods despite not being tied to a single commodity.
While the company’s revenue has been on a general uptrend since listing, it hasn’t been without volatility or at the cost of profits.
It experienced a particular lull in 2019 due to decreased project activity as a result of less supportive commodity prices, then crashed to lows along with everything else in March 2020 at the onset of the Covid-19 pandemic.
This was also exaggerated further when their profitability took a big hit as a result of a $17.6 million write-off of a project that went into liquidation in 2020, which greatly affected their bottom-line profits for the year & put them into negative-profit territory.
Since that low, however, the stock has been on a near-continual uptrend.
This has come off the back of a flurry new of mining projects and newly-listed ASX miners – and greater-scale talks of an upcoming ‘commodity supercycle’ worldwide – having resulted in a strong project pipeline and reversed sentiment entirely.
The company was formed in 1986, and listed on the ASX in April 2011.
It has returned an average of 5.07% p.a. (annualised, including dividends) since listing.
What looks good:
- GNG has a solid pipeline of projects with a strong order book mostly of domestic projects that extends into 2023; this includes maintenance contracts which can last multiple years (particularly through Upstream Production Solutions in the oil & gas sector). With the upcoming decommissioning of fossil fuel projects over the next decade, more of these projects are poised to add a more frequent source of revenue for companies such as GNG.
- They have booked significant amounts of revenue that has not yet been factored in to the share price. GNG were awarded multiple new contracts toward the end of 2021 calendar year that resulted in the company releasing predicted profit upgrades from $440-$460 million, to $540-$560 million; that’s a 20+% increase on the previous forecast, and a 42% increase on the previous year…
- … and yet, the share price only jumped up less than 10% since the news was released. Based on these expected forward figures to be released at the end of February, this indicates it’s likely undervalued by the market.
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The company boasts a good, heavily-invested ownership profile that we like to see, with strong support from insiders who are heavily incentivised to maximise profitability for their own benefits. A good blend of insto’s, external companies, and board share ownership in particular:
- For investors, they’re a proxy to invest in the mining industry without being tied to a single commodity’s boom or bust period – given the wide range of materials they service – which is nice. While they’re still subject to overall “commodity” sentiment, the diversification of materials they can service helps alleviate risk somewhat.
- GNG have generated an extremely decent amount of cash at bank. This increased 84% in FY 2021 to around $69 (nice) million, up from $37.5 million in the previous year.
- They also pay a good dividend which is (currently) fully franked; add in all this extra revenue/cash generated, and the company may look to increase this already-chunky dividend (currently around 6%) even higher in their next shareholder report.
- They traditionally turn in a very strong RoE (Return on Equity) – one of the strongest of any company on the ASX in its sector – and 2021 was no exception, coming in at 45%+. While this was coming off a down year, for sake of comparison the next-closest among its peers is giant CIM (which just had a record year) at ~37%. Essentially – they do a solid job at being extremely efficient with shareholders’ money:
- They won the contract with the Australian government to decommission the Northern Endeavour FPSO (a stranded floating oil vessel), an example of their competence with winning tenders in the public sector & being able to add government contracts to their target client list.
- No cap raises/dilution required to speak of; everything has been funded via their own revenue without dipping into shareholders’ pockets.
- Their acquisition of Mipac in 2021 put them in a position where they can easily hop on the renewables bandwagon. They’re looking to provide design solutions to the battery (graphite) sector in particular.
- Australia is a mining-centric country, so there’s always going to be a backbone of potential work for companies such as GNG. In addition, while mining projects may succeed or fail and material prices may fluctuate after they’re complete, that doesn’t really matter to GNG as they simply get paid to get the project up and running; then what happens afterwards in terms of project success isn’t really their concern.
- Overall, this is basically the strongest the company has looked in its history both financially & in terms of industry recognition. While a business like this will always be cyclical, their current strong order book and great cashflow generation puts them in a very solid position moving forward.
What doesn’t look good:
- Service & project-oriented companies such as GNG are contract-dependent, so revenue can be spiky depending on the overall quantity of mining industry projects taking place within Australia at any one time as well as their ability to win those contracts. This can be a concern because…
- This is a fairly crowded sector overall, with multiple other engineering services firms vying for tenders and competing for a limited number of projects that are taking place. Even in terms of just listed ASX companies, there’s around 14 which could be considered at least semi-direct competitors to GNG. Does what GNG offer stand out enough from the rest in terms of providing any kind of moat?
- The company had seen a decline in margins in the handful of recent years between 2015-2019 and before the post-Covid 19 recovery upswing. While this has recovered for the time being, it can be a red flag and is worth keeping an eye on.
- Its Earnings Per Share were steadily declining over the same timeframe as well, creating a frustrating period for shareholders. Will this recovery be sustainable for the next few years, or is it merely a blip before reverting back down to the greater trend?
- In 2021, its share price has run a little hard vs. the currently reported earnings. While this should even out once the 2021/22 figures roll in (based on their updated guidance figures, an EPS of 0.292 which would translate into a P/E ratio of roughly ~7), it still remains to be seen. If you’d bought into this share earlier in 2021, you’d currently be laughing, however.
- As a result, at the time of writing based on most recent earnings (although these will shortly be out of date), it now looks to be merely ‘adequately-valued’ vs. its industry peers:
- There’s been minimal recent insider buying of shares from any management. If the share price looked/felt cheap – particularly after recent dips – why didn’t execs scoop some up in order to increase public sentiment?
- Being another company with a share register that’s tightly-held by insiders means it’s fairly illiquid. As always, these types of stocks with lower trading volumes can make it tougher to get in or out. A.k.a, if you want regular daily movements to excite you, this will no doubt be ‘boring’.
- This is simply another “unsexy” stock that is fairly ignored by the market given contract wins are typically the only “noteworthy” news a company of this fashion can achieve. They have little brand recognition by the general public, and no real sexy story with which to garner mainstream media attention.
Summary:
The prospect for investing in companies such as GNG often depends on several main factors.
They’re overly dependent on overall bullish sentiment on/demand for commodities & mining projects, as well as their own reputation for being able to deliver such projects on time and on budget.
Fortunately for Australia, the mining sector has managed to escape much of the wrath of the Covid-19 pandemic that crippled many other industries such as retail, being only moderately effected.
While oil & gas extraction declined temporarily in 2020-21 due to weaker demand, the tail end of 2021 has seen a strong recovery; the gold mining industry actually benefitted from the pandemic & is seeing a resurgence; and the renewables transition looks poised to bring on a whole new genre of projects over the next decade.
According to the Department of Industry, Science, Energy and Resources, the value of gold and EV related projects upcoming rose by 36% and 12% from 2020-2021, and the quantity of projects has surged even more with the emergence of hydrogen’s inclusion as an energy resource.
Gold and LNG projects (two of GNG’s specialties) specifically are showing significant promise in particular, as higher gold prices are drawing out previously ignored projects and early stage projects are greatly increasing across the sector in general.
The vast majority of these are taking place in Western Australia, which also works in GNG’s favour being headquartered there.
Valuing companies such as GNG moving forward can also be difficult due to a lack of transparency on the duration of existing contracts, as well as vagueness for providing an overview of all currently-signed contracts on the books.
Fortunately, GNG do a pretty decent job of this, and their strong upcoming pipeline of work already accounts for over half a billion $ worth of revenue.
They are positioned to capitalise on this growth in mining projects moving forward, however with companies such as this it’s heavily important to keep a keen eye on their newsflow and contract announcements, as a dry period can be an early indicator into an upcoming ‘lean’ year for their bank account.
Conclusion: If you’re bullish on the near-term future of the Aussie mining sector yet not fully convinced on a specific mining company or commodity to invest in, companies like GNG can be a decent enough way to hedge.
As long as they’re solid fundamentally, they can be a fairly good proxy for how the industry is faring in general, and GNG in particular has enough of a legacy and a diverse portfolio of proven work covering a wide enough range of projects to have a shot at winning contracts for plenty of types of jobs.
Their Mipac acquisition added not only more work capacity but also “buying existing relationships” that the company already had in place as well, and across their parent and sub-brands are able to service pretty much any phase of a mining project – from assessment, to consultation, to construction & maintenance.
Their management are heavily involved in the business and have proven to be adept at generating strong returns on equity.
Cashflow is strong, they have no concerning debt, and a strong project pipeline, with the commodities sector to be in a pretty strong place moving forward.
As mentioned, I already bought into these guys (around the $1.50 mark), so it will be interesting to see if it can maintain its recent momentum even if the share price has run a fair way since that purchase date.
Their expected earnings figures due soon should hopefully justify a re-rate, and even if you were buying in now and the share price stagnated a bit, their dividend yield is strong enough they’re still going to give you decent capital returns over the next couple of years in an otherwise low-interest-rate environment.
It all depends, of course, on how the market reacts to updated numbers – which is never a sure thing at the best of times, let alone when interest rate hike fears are dominating the news headlines.
Company website: https://www.gres.com.au/
MarketIndex page: https://www.marketindex.com.au/asx/gng
Feel free to add your own opinions on GNG in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
