"Here they are on their last legs having gone yet another year...

"Here they are on their last legs having gone yet another year without making any money and what do they announce.....Performance rights. And terrible ones at that. Watch them do a CR and use this to pay a dividend in the next 3 years.
Read the room guys FFS"

Pointed post.

It's quite a scary room.

I maintain a spreadsheet which screens out, among other things, Revenue to Market Cap, and this stock has for some time ranked right near the top (~$450m in Revenue vs $27m Mkt Cap, a whopping factor of almost 17x).

Learning over the past few days about the demise of fellow engineering construction company, Clough, I thought might imply that the industry has become too competitive and that terms for companies in this field might improve with a major competitor like Clough, having failed.

So it prompted me to run the 30-minute rule over DCG - because, as we all know, just small sliver of operating margin carved out of a very large Revenue pie, translates int to a meaningful profit bite. Especially compared to the current market value of the company.


Whenever I look at a company I don't know, the very first metric I look at is the most recent Retained Earnings number.

Of course, in isolation it might not mean anything, because the Retained Earnings balance of the company in question might be muted due to high dividend payout ratio policy.

Which is why the next thing I look at is the Issued Capital number, not just today, but how it has changed since, say, 10 years ago.

Because a modest level of Retained Earnings combined with stable level of Issued Capital could be a positive thing, maybe reflecting a company that has not leaned on its owners for funding and that might have been sound enough to be able to pass on a large proportion of its earnings to shareholders.

As first-pass metrics, these often provide some insights into the business pedigree (or absence of it).

In DCG's case there are no Retained Earnings; instead, the Accumulated Losses amount to an eye-popping $242m (!)

$240m cumulative losses racked up buy a business which is today a sub-$30m company. That's quite something.

Added to that is the fact that Issued Capital account for DCG has risen by a jarring factor of 3.8 times since 2011 (which is far back as I checked), from $74m to $280m. That's a compound growth rate in Issued Capital of more 10% per annum, which sure is lusty.

But, worse, because each equity issuance has been conducted at lower prices, the number of Shares on Issue has risen at an alarming rate, from 11.6m in 2011 (adjusted for 2020's 10-for-1 consolidation) to 155.4m today. That's a 13-fold rise in almost years - average annual increase in shares on issue of 20%pa... truly Herculean stuff)
(And that's not even including all the shadow equity outstanding today - 21m performance rights and 20m warrants).

Shareholder Equity is today of a similar order of magnitude as it was in 2011 (the black dotted line in the chart below).

But as can be seen, the components of the company's Equity position have moved in totally opposite directions: The Retained Earnings account (red line) has deteriorated by almost $250m over that period. Dividends accounted for only $100m of that, which meant an additional $200m of Share Capital (blue line) has needed to be issued:


[The delta between the Retained Earnings peak in 2015 and the Accumulated Loss position today is a mind-blowing $400m. It's not a typo: it really is four hundred million dollars of cumulative losses incurred over the past 7 years.]

It hasn't always been that way, though; until 2015 the business was profitable and generated meaningful amounts of free cash flow: a significant total of $187m between 2008 and 2015, of which around $75m was paid out as dividends and ~$105m was spent ("dusted", more like it) on acquisitions

But for the past 7 years, the shareholder value destruction has been stunning (admittedly amplified by Covid in 2020 and 2021, but the rot had clearly set in well before then):


_{(For some added context, the figures in the yellow box show the amount of capital that was raised in each respective year)}


For me to be happy to allocate my family's capital to buying shares in this business, I'd have to be of the view that the "good times" are returning for DCG - not just "good times" in terms of demand for the company's services, but good times in terms of the company being able to actually make a profit during those good times.

But I'm not in possession of any insights that would make me change my view.

Engineering construction is a grueling industry at the best of times, but fixed price projects are even more potentially perilous today given the current upwards mobility of input costs, meaning that even small missteps in either estimating or execution, end up in yet more tens of millions of dollars of losses.

So there is always need for wiggle room and the thing that worries me most about DCG is that the balance sheet is short of wiggle room right now, being run without any cash buffer, which I think is a no-no for a business of this kind:




Which explains why they had put the Investment Property up for sale-and-leaseback: a monetisation exercise to bolster the much-needed liquidity for the balance sheet.

(The sale has gone very quiet, after being handed over to the agent in May calling for Expressions of Interest in July, so who knows where it's at? Stalled, looks like.)

But even there I had questions: the carrying value of the Investment Property is $57m, but that value has been written down aggressively over the years (at one stage - 2013 or 2014? - I recall it being close to $200m), so who knows what they could have got for it today?

In FY2013 and FY2014 (presumably when it was fully occupied with all the LNG plants being built in Gladstone), the Accommodation Village generated Revenues of, respectively $37m and $57m, and Pre-Tax Profit of $14m and $28m, respectively.

But over the past 4 or 5 years it recorded Revenues of in the mid-single figures and made losses (Covid-impacted in 2020 and 2021, obviously)
In FY2022, it made $9.3m in Revenue and $1.3m in Pre-Tax Profit.

Who knows whether such an asset is worth $57m, or $67m or $47m?

The $57m carrying value certainly doesn't "feel" outrageous; assuming the facility can get to post-Covid earnings next year of $3m or $4m, so if they could have got get anything around $50m for it I think it would have caused something of a share price pop, because it would have removed the financial risk perceptions that exist currently.


In conclusion, despite the first glance appeal of DCG's very large Revenue base compared to the company's teeny Market Value, as an investment proposition, it's just too hard for me.

There might be a 12-month period over the next few years in which they price a few jobs well and manage to somehow not stuff up badly on cost overruns, in which case they could make $7m or $8m or even $10m in EBIT, but knowing when that might happen (indeed, if it happens) is akin to shooting craps.

Elephant in the room question: Is there a risk that the fate of the business ends up similar to Clough (or RCR Tomlinson, or Forge)? Sure. Given the risky nature of engineering construction businesses, it's a perennial risk, and should DCG stand on any landmines, it might be difficult to recapitalise the business adequately given the very small market capitalisation.

That's the irony of the investment: that small market cap which might make it look appealing from an investment standpoint, at the same time presents a possible existential risk.


.