Recently, engineering and maintenance contractor SRG Global (ASX: SRG) reported its FY 2023 results. A glance at the company’s scorecard would imply growth across all metrics, as you can see below. The company boasted that the “underlying FY23 EBITDA result of $80.1m (after excluding one-off transaction costs of $4.5m for the Asset Care acquisition and $2.0m relating to exiting the Building Post-Tensioning and Middle East businesses) is above our previously upgraded guidance range of $79m to $80m.”
However, the adjusted numbers below exclude acquisition costs and a few other non-cash or one-off charges.
If you use statutory EPS, then the result was 4.7 cents per share, up slightly on last year, but with the second half contributing only 2c, compared to 2.5 cents in the second half last year.
The large adjustments made to Earnings Per Share to achieve Earnings Per Share (A) include some rather legitimate one-off expenses, such as $4.5m on the recently consummated merger with ALS Asset Care, and a few million in amortisation of acquired intangibles.
As you can see in the chart below, statutory EPS has been volatile over the years, but remained sufficient to support the trailing twelve months dividend yield of 4c per share, or about 5.7% fully franked, at a share price of 70c.
While we knew the cash position would be spent on the acquisition, the net debt of $17m was worse than I expected, because the second half saw strongly negative free cash flow, even excluding the acquisition payment for Asset Care. The MD said, “we’ve won more than $1.2 billion worth of work in the last 12 months. We got to fund that.”
Management did not seem too concerned about the balance sheet, arguing there is “Available liquidity of $143.8m, comprising cash on hand of $47.7m and available undrawn working capital and equipment finance facilities of $96.1m.”
For FY 2023, the cash conversion, as the company defines it, was 68%. The MD said on the conference call that “I think circa 80% cash conversion would be a good proxy for us moving into the future,” implying he expects better operating cashflow in FY 2024.
Looking forward, the MD said: “I’m comfortable that we’re winning on the right commercial terms with the right clients with the right skills, but also with the knowledge that we can execute it well.”
The company says:
“Importantly, the contract wins are being achieved at strong margin, across a diversity of sectors and geographies and thereby positioning SRG Global for long-term, sustainable growth. The Company has record work in hand of $1.9 billion, which is up 46% on FY22 with two thirds annuity earnings profile and positive exposure to the asset maintenance, industrial and mining sectors as well as significant investment in the infrastructure and construction sectors.”
Overall, this was a disappointing profit result from SRG Global. However, FY 2024 profit should benefit from a lack of acquisition costs, and also a full year’s contribution of ALS Asset Care. The dividend yield is solid, grossing up to about 8.1% once you include the benefit of franking credits. However, the weak cashflow, combined with the CEO selling shares, mean that SRG cannot be upgraded to buy.
I would not initiate or add to my SRG Global position, due to lack of confidence in management alignment and weak cashflow. Furthermore, I believe analyst forecasts, which were previously too bullish in FY 2023, are probably too bullish again in FY 2024. Ultimately, then I don’t see much upside in SRG Global in
In time, I will probably look to sell my SRG Global shares. However, at the current price, I think the dividend yield is sufficient to justify holding on to the shares until Mr Market offers a more attractive price. However, one potential consideration that could cause me to sell would be if I found a more attractive dividend stock to own.
Disclosure: The author of this article Claude Walker owns shares in SRG. He will not trade SRG shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).