The target is around double the last traded price. The following is an extract from the report.
An overlooked growth opportunity
OTC is a unique growth opportunity, not generally recognised, following a substantial change in its operational base over the last 2 years.
These current operations have a record of strong growth and success on project delivery, across:
OTOC Australia - A specialist in the installation and maintenance of support and remote site infrastructure for mining, oil and gas, and government projects. This includes construction, installation and maintenance of remote camps and facilities.
Whelans - A specialist surveying, aerial and ground mapping, and town planning group to the mining, oil and gas, land development and government infrastructure sectors.
Rapid improving financials
For FY2013, OTC generated a 36% increase in Profit to $5.2m on a 25% fall in Revenue to $114m. Highlights were:
- A 3% decline in OTOC EBIT to $6.5m, despite a 37% Revenue fall due to a slower resources sector, with strong growth in the higher margin Facilities Management and Communications divisions (off a low base) and improved cost controls and systems.
- A 14.3% increase in Whelan's EBITDA to $4.2m, on an 11.1% increase in revenue, with a further broadening in the spread of operations.
- A partial offset from a 46% increase in corporate costs, as OTC relocates its head offices and strengthens its support base.
- A strengthening in the Balance Sheet, with a reduction in gearing and a 16% increase in NTAV to 7.6¢ ps. Cash at 31/12/13 stood at $9.0m (4.7¢ ps).
Growth in FY2014 is underpinned by a strong order book, with around $40m in recent new contracts and Revenue of $39m in Q1 FY2014, that includes:
OTOC - Further work for Rio Tinto at a number of its WA sites, a continuation of work on the Nauru Processing facility and an increasing level of recurring revenue from its newly created communications and facilities management divisions.
Whelans - Strong growth over the next 2 years, with a change in management, a heavier focus on driving revenue through new contracts, a broadening of its offering and opportunities from sector consolidation. We expect EBITDA margins to move from current levels of around 9.6% to over 12.0% in 2H FY2014.
A return to Revenue growth is expected in FY2014, with OTC already indicating good 1H FY2014 growth, with growth of over 10% pa forecast for the next 3 years.
The main drivers will be both organic and acquisition growth, resulting in strong increases for Whelans, Communications and Facilities Management.
We expect a continued expansion in EBIT margins, with a change in revenue mix, economies of scale, cost control and continued systems improvement.
We initiate with a BUY recommendation and a Price Target of $0.21 ps , based on:
- A leading position in its sectors with an excellent record of delivering on projects, resulting in a high level of repeat business.
- A strong client base for OTOC across major resource, construction and government groups, and a diversified base for Whelans across over 200 clients.
- Growth opportunities in both operations, including industry consolidation and the development of an increasing level of recurring revenue.
- An improving Balance Sheet with low gearing, substantially asset backed.
- An attractive valuation, at a 47% discount our conservative valuation of $0.21 ps.
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