Diversifying Into Health And Education Sectors Will Open Future Opportunities

Key Takeaways

• Significant project wins and backlog orders indicate strong future revenue potential, with expanded operations driving geographic growth across new markets.
  
• Diversified sector focus and enhanced service offerings are expected to diversify revenue streams and improve net and gross margins.
  
• Revenue stability and growth are at risk due to defense pipeline issues, modular sector delays, and challenges in hiring skilled employees.

Catalysts

Engages in the construction, fitout, and refurbishment of commercial properties in Australia.

• SHAPE Australia's project wins and backlog orders increased significantly, indicating a strong pipeline of future work that should drive revenue growth. The backlog orders are up 13%, ensuring revenue continuity into the second half of FY '25 and potentially beyond.
  
• Geographic expansion, including new operations on the Gold Coast, Tasmania, and Newcastle, has significantly increased revenue in these regions, with an overall increase of 236%. This expansion should continue to drive revenue by tapping into new markets.
  
• The company is focusing on non-office sector expansion with strong prospects in health, hotels, education, retail, and defense sectors, which are expected to provide a diversified revenue stream and improve net margins by reducing reliance on the commercial office market.
  
• Service offering expansion, particularly in the modular and Design & Build services, is expected to contribute to higher gross margins. Modular business, in particular, offers gross margins of over 15%, which is significantly higher than the core business.
  
• Strong cash and liquidity position with $118.9 million in cash and marketable securities enhance the company's ability to invest in growth opportunities, potentially increasing earnings through strategic acquisitions or expansion initiatives.

SHAPE Australia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SHAPE Australia's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.0% today to 1.9% in 3 years time.
• Analysts expect earnings to reach A$20.2 million (and earnings per share of A$0.23) by about February 2028, up from A$17.9 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 17.9x on those 2028 earnings, up from 14.8x today. This future PE is greater than the current PE for the AU Construction industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

SHAPE Australia Future Earnings Per Share Growth

Risks

• The Australian Defence Strategic Review has dampened the defense pipeline, which could negatively impact revenue from defense projects.
  
• Delays and withdrawals in the modular sector, exacerbated by the Commonwealth Games cancellation, might strain revenue projections and impact future earnings.
  
• High concentration of work in commercial office projects remains a focus, but market fluctuations and incentives for rental spaces could impact revenue stability.
  
• Company growth is limited by the speed at which it can hire skilled employees, posing a risk to revenue and net margins if demand surges unexpectedly.
  
• Despite positive modular business margins, significant investments in personnel and facilities might strain earnings if projected growth and execution do not materialize as planned.

Valuation

• The analysts have a consensus price target of A$3.56 for SHAPE Australia 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$1.1 billion, earnings will come to A$20.2 million, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$3.21, the analyst price target of A$3.56 is 9.8% 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.