Perdaman Contract Worth Up To $45 Million Set To Strengthen Future Market Position

Key Takeaways

• The Perdaman contract and expansion in Western Australia bolster future revenue, profitability, and market foothold in the industrial sector.
  
• Aggressive capital expenditures on product development and infrastructure aim to diversify revenue and improve long-term earnings growth.
  
• Acrow's focus on new business and market penetration carries financial risks, such as strained cash flow, higher debt, project delays, and increased interest expenses affecting margins.

Catalysts

Provides smart integrated construction systems across formwork, industrial services, and commercial scaffolding in Australia.

• The acquisition of the Perdaman contract, which is expected to generate $40 million to $45 million in revenue and significant profits over the next 2.5 years, offers a strong foothold in the Western Australian industrial market, impacting future revenue and profitability.
  
• The aggressive capital expenditure plan aimed at new product development and expanding the industrial access division is expected to diversify revenue streams and improve return on investment, benefiting long-term revenue and earnings growth.
  
• Strategic investment in ATEC and the new training facility in Mackay is expected to ensure a steady supply of skilled labor to support growth in the industrial segment, potentially improving operational efficiency and earnings.
  
• Expansion into the jumpform and screens business, with a focus on organic growth, sets the stage for significant profit contributions, as evidenced by recent contract wins, impacting future revenue and EBITDA.
  
• Strong pipeline growth, particularly in the formwork business, coupled with the upcoming opportunities related to Queensland infrastructure projects, including Olympic and hospital projects, is anticipated to provide a robust revenue stream and EBITDA growth in the coming years.

Acrow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acrow's revenue will grow by 17.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 13.1% in 3 years time.
• Analysts expect earnings to reach A$45.8 million (and earnings per share of A$0.12) by about March 2028, up from A$22.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 14.5x today. This future PE is lower than the current PE for the AU Trade Distributors industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 5.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

Acrow Future Earnings Per Share Growth

Risks

• There is a significant focus on capital expenditure to grow new business areas, which while potentially positive for future revenue, could negatively impact net margins if the investments do not yield the expected returns quickly. This could strain cash flow and increase debt levels.
  
• The company has a large pipeline in Queensland, but delays in the execution of government projects and changing government policies could lead to short-term revenue shortfalls. This uncertainty around project start times could impact cash flow and earnings visibility.
  
• Acrow's aggressive strategy in pursuing new markets and sectors involves inherent execution risks, such as the challenge of integrating acquisitions and the cultural fit of acquired businesses. This could affect operational efficiency and profitability.
  
• The industrial access business's reliance on large contracts like Perdaman poses concentration risks. Any delays or issues with these projects could substantially impact Acrow’s revenue and earnings.
  
• The increase in interest expenses (up by 53%) due to higher debt levels and interest rates could continue to exert pressure on net profit margins and earnings per share, especially if revenue growth does not adequately compensate for the increased cost of capital.

Valuation

• The analysts have a consensus price target of A$1.325 for Acrow based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$349.7 million, earnings will come to A$45.8 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$1.06, the analyst price target of A$1.32 is 20.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.