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Dean Mico
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I manage a private investment fund in Australia known as The Edge Fund. I invest in the best Australian stocks using a value investing methodology. I overlay this with technical analysis to buy low and sell high. My website is www.edgeseven.com.au
My company:
Edge Seven Pty Ltd
My blog:
Edge Seven Value Investing
  • ASX: GNG - GR Engineering Services Limited 0 comments
    May 14, 2012 12:42 AM

    GR Engineering Services Limited (ASX:GNG) is an engineering, consulting and contracting company specialising in fixed price engineering design and construction services to the resources and mineral processing industry.

    Founded in Perth, Western Australia in 2006, GR Engineering has rapidly grown through the completion of design and construction projects and studies for a diverse range of clients, including global mining houses, mid-tier miners and junior developers undertaking their first project.

    Does this business have a sustainable competitive advantage?

    GR Engineering utilises a unique business model to most other engineering, procurement and construction (EPC) companies. GR Engineering predominantly provides a 'lump sum' approach to costings for clients rather than a 'cost plus' margin approach.

    GR Engineering's lump sum approach gives GR Engineering a point-of-difference over its competition as it provides secure cost, time, plant performance and contract completion warranties and guarantees. In short, GR Engineering provides a large degree of certainty to their clients.

    The benefit of this lump sum approach can be seen in recent contract wins in April this year.

    On the 3rd of April, GR Engineering announced a $12 million EPC contract win for Sandfire Resources NL for the paste backfil plant at DeGrussa copper-gold project in Western Australia.

    On the 23rd of April, the company announced a $18 million EPC contract for Newcrest Mining Limited for the refurbishment and commissioning of the dump leaching facility at Newcrest's Telfer mine in Western Australia.

    GR Engineering reported with the announcement about this most recent $18 million contract that this was in fact the third EPC engagement at Telfer within the past 12 months and was awarded after the delivery of engineering studies conducted by GR Engineering.

    It appears that GR Engineering has developed strong working relationships with companies such as Newcrest Mining and that GR Engineering has the capability to delivery significant value to their clients projects.

    GR Engineering has current and recently completed studies that could convert into $1.4 billion in EPC work. GR Engineering has a history of converting about 50% of studies into projects. This bodes well for the future earnings of the business in what can be a 'lumpy' business model at times.

    What are the risks facing this business?

    One risk is the company's reliance on the boom in our mining sector continuing. GR Engineering generates its revenue from EPC mining services contracts.

    GR Engineering also faces the risk of being unable to complete the contracts they enter on time and on budget. This risk is not only an immediate commercial risk but also a risk of losing a part of their good reputation.

    Is it run by able and trustworthy management?

    GR Engineering's management have under-promised and over-delivered since they lodged the prospectus to become a publicly listed company on the ASX. In the company's prospectus, it forecast its Net Profit after Tax(NPAT) to be $18.8 million but exceeded this with a NPAT of $21.1 million. This was contributed to by forecasting $138.3 million in revenue but actually achieving $142.5 million.

    The business is run with plenty of cash on the balance sheet. In fact, the company reported their December 2012 half year report a net debt/equity position of -88.7%. The negative number is a good sign, it means that 88.7% of the company's equity is in cash. The cash on the balance sheet gives a couple of options to the company. The best option is that GR Engineering has the ability to take on larger projects and fund the operations of the projects from cash.

    Is it trading at a bargain price?

    Some comments in the company's half yearly results presentation on 21/2/12 provided the catalyst for the share price to fall since. The company presented that 2012 full year result will see profitability impacted due to:

    · Accounting treatment delaying recognised profits in 2012 financial year for current projects

    · Delays in contracts being awarded due to uncertain financial and commodity markets

    · Increased costs associated with being a listed company and the cost of positioning the company for future growth

    This has provided an opportunity to buy this company at a very fair price.

    Rank2011 Actual ValuationToday's Share PriceMargin of Safety2012 Forecast Valuation2013 Forecast Valuation
    Gold 1$2.88$1.2817.42%$1.55$2.72

    (click to enlarge)

    Summary

    In summary, GR Engineering is a profitable business with good cash flow and experienced management. The company has plenty of cash on hand and the capabilities to take the business to the next level.

    Disclosure: Dean Mico has purchased shares in GR Engineering in the past week.

    The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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