Wagners: Offshore strategy progressing; positive domestic outlook

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
24 February 2022, 12:30 PM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Wagner (ASX:WGN) continues to progress its long-term growth initiatives of developing its CFT and EFC business. While the associated cost investment weighed on the interim result, it will improve the earnings quality of the business in time.
  • The CMS outlook is positive and CFT is set for a stronger 2H. The EFC external investment process is progressing and we continue to view a potential transaction as an important catalyst to re-rate the stock. Add rating maintained.

EFC and CFT investment continues; solid core CMS result

Greater investment in EFC and CFT and higher corporate costs (+17.9%) caused WGN’s 1H22 result to come in below expectations. While revenue rose 10.6% to A$172.2m (5.8% ahead of MorgansF), reported EBIT was A$10.7m largely flat YoY and below our forecast of A$12.2m.

Excluding EFC’s EBIT loss of A$1.9m, WGN noted operating EBIT was A$12.6m (+8.2% YoY). Reported NPAT of A$4.7m was broadly in line with our forecast of A$5.2m due to lower net interest expense.

The core CMS business delivered a solid result, with revenue +10.0% YoY and EBIT of A$18.6m (+26.0% YoY; flat on 2H21), benefiting from completion of the remaining ~30% of the CRR precast tunnel segment contract, solid cement and concrete sales (revenue +32%) and growth in its steel business. Concrete margins were again called out as below expectations.

An incremental A$1.1m EBIT investment (loss of A$1.9m) was made to support EFC’s commercialisation, including increased R&D, international expansion costs and appointment of a dedicated CEO. While CFT saw a top-line improvement (revenue +15%), profitability (EBIT -82% to A$0.4m) was impacted by increased costs from its new US facility, lower cross arm sales and higher input costs.

Operating cashflow was weak at A$4.2m. However, working capital was impacted by a build in payables (+A$6.6m) and a deliberate decision to build inventory (+A$10.2m) in response to supply chain challenges. Capex rose to A$14.5m from A$6.4m in 1H21 and net debt was A$60.6m and largely steady on the pcp. 

Outlook remains positive; focused on advancing key initiatives

The CMS outlook was upbeat and WGN expects SEQ construction materials demand will remain strong. Key 2H22 CMS drivers include:

  1. improved concrete market conditions (price rises of 10-20% in aggregate by end of FY22);
  2. 6-month contribution from its 3-year (A$33m total) McArthur River Mining haulage contract (started Dec-21);
  3. benefit of a new mobile concrete project; 
  4. solid precast pipeline; and
  5. continued strong cement volumes, with Port of Brisbane cement import volumes up 25% on a R12M basis (BLD contract volume proxy for FY23). Cement margins are expected to be impacted by increased shipping costs.

We expect a stronger 2H22 from the CFT business as overhead recovery in its Texas manufacturing plant should improve as production starts. Importantly, WGN has a solid order book across ANZ and the US.

Management’s decision to progress installation of a second pultrusion machine in the US provides a positive initial indication in the facility’s medium-term prospects. M&A remains of interest to provide instant scale to the US CFT business. 

EFC commercialisation progressing; third party investment process ongoing

With customer trials in the UK, Germany and India progressing well, WGN will start manufacturing EFC through a new UK facility soon. The current investment run-rate is expected to continue through 2H22 with the annualised rate (A$4.0m EBIT loss) expected to support its strategic initiatives over the next 12 months. New international partnering arrangements are expected to deliver revenue in FY23.

The EFC external investment process WGN is still underway and a potential transaction could be secured by the end of CY22 (has slipped on 3Q22 target). WGN remains upbeat on a potential outcome.

Investment view

We detail forecast changes overleaf. Overall, FY22 EBIT falls 0.7% to A$25.2m and FY23/24 EBIT rises 1.2%/1.1% due to stronger CMS and CFT assumptions. WGN continues to make solid progress on advancing its long-term growth initiatives across EFC and CFT, which will improve the earnings quality of the business over time.

While the timing has been delayed, we continue to view a potential investment in its EFC business as an important catalyst to support a re-rating. In the interim, the core CMS business is well positioned to leverage an improving SEQ construction market.

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