Wagners: Doubling down on the NewGen opportunity
About the author:
- Author name:
- By Kurt Gelsomino
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- Date posted:
- 26 August 2021, 10:30 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- WGN’s FY21 result highlighted its clear earnings recovery, with strong cash generation and continued de-leveraging key highlights.
- Further growth in CMS is targeted in FY22. WGN will accelerate its EFC investment and progress the ramp-up of its US CFT manufacturing facility. While this will limit the extent of FY22 earnings growth, these remain important long-term growth drivers for the business.
- We continue to view the external EFC investment process as an important catalyst for the stock, which could unlock further valuation upside to our (login to view) PT.
FY21 cements earnings recovery
Wagners (ASX:WGN) posted FY21 revenue growth of 28% and EBIT of A$25.4m (+195% yoy). The strong earnings recovery reflected the combination of normalised cement volumes, increased concrete sales (+ reduced start-up costs) and strong contributions from its major projects with the Carmichael Mine and Cross River Rail.
WGN increased its investment in EFC (A$2.0m EBIT loss) and COVID delays impacted 3Q21 pedestrian infrastructure sales, resulting in a weaker than expected CFT result (revenue -6.8%).
While assisted by A$10m in timing benefits, operating cashflow (A$53.1m) was a key highlight and enabled net debt to finish the year at a better than expected A$48.8m (down from A$83.1m the pcp).
CMS targeting growth; increasing CFT and EFC investment to drive growth
No formal FY22 guidance was provided. WGN is targeting further growth in its CMS business underpinned by: an increased contribution from bulk haulage with further contracts tendered; increased concrete volumes (potential price upside) and higher sales of cement, flyash and aggregates; and completion of the remaining 30% of the CRR tunnel segment contract (at stronger margins), with the pipeline of additional precast work remaining positive.
Contract crushing revenue is expected to be largely stable and material mobile concrete opportunities in the renewables sector remain (more a 2H22 benefit, if secured).
The EFC investment process is progressing, with the first phase completed and WGN moving to the second phase (formal IM released) in coming weeks. No specific timeline on a potential transaction has been provided.
We continue to see the ability to secure third party investment as an important catalyst to both crystalise an initial valuation for the business and help accelerate the product’s commercialisation.
Regardless of the outcome, WGN will materially step-up its level of investment in EFC in FY22 (EBIT loss to increase to ~A$4m from A$2m) to support its long-term growth ambitions.
Construction of the Texas CFT manufacturing is underway and targeting completion in Oct/Nov-21. Positively, WGN has secured initial US orders (cA$3m) which it will complete over the coming 12 months. We expect an increased investment in opex will be needed to support the ramp up of the US facility, which will likely limit the extent of CFT EBIT growth in FY22.
However, increased ANZ pedestrian infrastructure and road bridge sales are expected and the crossarm business should benefit from 12 months of its automation line (margin accretion).
We have reviewed a number of our assumptions and adjusted our forecasts for AASB16 (MorgansE material NPAT hit of A$2.2m in isolation). Our FY22 EBIT forecast has fallen 7% to A$24.7m and FY23 EBIT has increased 1% to A$27.8m.
While we have increased our FY22/23 CMS forecasts, the larger than expected investments across EFC and CFT (US start-up costs) are the key drivers of our forecast for a modest reduction in FY22 EBIT (2.9% yoy).
We note our forecasts could prove conservative in the event new, material haulage/crushing contracts are secured, concrete prices strengthen more than anticipated or new concrete project works are secured.
Investment view: maintain Add rating
WGN’s core CMS business remains well placed to benefit from an ongoing cyclical recover in construction markets. While the planned investment in EFC and CFT will weigh on near-term earnings growth, these are important long-term growth drivers for the business.
Importantly, the balance sheet is in a strengthened position to support this investment. We continue to view the EFC external investment process as an important catalyst for the stock. Add maintained.
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