macquarie releases research report

Rated Analayst Andrew Wackett from Macquarie's research team has initiated coverage on GR Engineering with a price target of $1.94 and 12 month TSR of 100%.

GR Engineering
Unique business model
Event
?X We commence coverage on GR Engineering (GNG) with an Outperform
rating and A$1.94 target price.
Impact
?X Unique business model. GNG is a Perth-based engineering, project
management, design and construction company. What makes it unusual for a
listed company is that it is predominantly an EPC (lump sum) rather than an
EPCM (cost plus) company.
?X The self-perform model means GNG has limited direct competition and gives
the company unique insights into costs, schedule and design issues.
?X Strong history, bright outlook. GNG can trace its origins back to 1986
when the current management team founded a business called JR
Engineering. This business was sold to Downer in 2001. The same
management team then founded GR Engineering in October 2006.
?X The outlook for capital spending in the gold, base metals and nickel sector
remains strong given current commodity prices. In addition, there are
substantial geographic growth opportunities available to the company.
?X Outstanding financial growth and returns. From a zero base in 2006,
GNG is forecast to generate revenue of A$138.3m and EBIT of A$25.8m in
FY11. EBIT has grown each year, including during the GFC.
?X The EPC delivery model generates EBIT margins of 18.7% and ROE of nearly
50%. GNG will start its listed life with net cash of over A$40m on its balance
sheet. This and the capex light business model will allow a future dividend
payout ratio of 50-60%.
?X Key risks: The key risks of an investment in GNG include: A downturn in
commodity prices impacting demand for new processing plants; risks
associated with fixed price contracting; and risks associated with dealing with
smaller mining companies.
Earnings and target price revision
?X No change.
Price catalyst
?X 12-month price target: A$1.94 based on a EV/EBITA methodology.
?X Catalyst: Conversion of studies into construction contracts.
Action and recommendation
?X We commence coverage with an Outperform recommendation and A$1.94
price target. We believe GNG has strong medium-term growth potential.