Clime analyst Alex Hughes recently completed an analysis of the mining services company, Forge Group Ltd (ASX code: FGE). Forge provides a range of diversified services to the resources, building and infrastructure industries. Some points highlighted in Alex’s report:
- Since listing, FGE has displayed a consistently high NROE, averaging 42.7%:
- Compound annual growth rates since listing are revenue (+54.7%), NPAT (+95.3%), Dividends (+43.1%) and Equity (+70.0%);
- The business is conservatively financed with strong cash holdings ($78.3m), minimal debt ($8.2m) and moderate goodwill ($15.6m, 12.6% of equity);
- FGE has a low payout ratio of 20-25% of earnings, evident through the low dividend yield of 1.9%. Strong cash holdings provide an extra buffer against the cyclical and lumpy nature of cash flows within the contracting industry;
- Forge recently acquired CTEC Pty Ltd, a WA based contractor providing engineering, procurement and construction (EPC), operations and maintenance to the energy and utilities sector;
- FGE has been trading around 3 times its equity base. This represents an attractive price if the business is able to sustainably earn and compound at rates above 40%. At present the market is giving little value to the growth potential of the business.
Alex’s conclusion: “Forge is a competently managed business that is well placed to gain from the current mining capex. The shares are currently available at an attractive price on the market. We are happy to buy a stake in the business when the market is in a bad mood and the shares are trading at a significant discount to our valuation.”
Read the full report on Forge Group Limited
