The Diona Acquisition Will Advance Opportunities In Water Security And Energy Markets

Key Takeaways

• The acquisition of Diona enhances revenue growth potential and EBIT margin expansion through cross-selling and complementary synergies.
  
• SRG Global's strategic focus on annuity earnings and strong cash generation provides stability and supports future growth initiatives.
  
• Dependence on acquisitions and current contracts, along with uncertain synergy execution and underinvestment concerns, could affect SRG Global's earnings and long-term revenue growth.

Catalysts

Provides engineering-led maintenance and industrial services, and engineering and construction services in Australia, New Zealand, and internationally.

• The acquisition of Diona, a leader in water security and energy markets, which is expected to be circa 10% EPS accretive, suggests potential for significant revenue growth through cross-selling opportunities and expanded geographic reach. This can enhance revenue and potentially improve net margins through complementary synergies.
  
• The strong cash generation and maintenance of a robust financial position, moving from net debt to net cash with 117% EBITDA to cash conversion, indicate well-funded operations that support future growth initiatives. This is expected to positively impact earnings and provide a stable financial base for expansion.
  
• The strategic shift towards an 80% annuity recurring earnings model provides increased visibility and stability for future revenues, which can lead to more predictable and potentially higher earnings and net margins due to long-term contractual engagements.
  
• Significant tailwinds in the water security and energy transition markets, driven by macro factors such as population growth, climate change, and technological advancements, present growth opportunities for SRG Global, which can enhance revenue streams and further expand EBIT margins.
  
• The expected EBIT margin expansion through the capital-light nature of the Diona acquisition, alongside SRG Global’s high-margin existing operations, suggests improvements in overall profitability and earnings quality.

SRG Global Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SRG Global's revenue will grow by 13.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.0% in 3 years time.
• Analysts expect earnings to reach A$62.3 million (and earnings per share of A$0.1) by about February 2028, up from A$34.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, down from 25.7x today. This future PE is lower than the current PE for the AU Construction industry at 17.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

SRG Global Future Earnings Per Share Growth

Risks

• The acquisition of Diona, while touted as transformational, relies heavily on expected revenue synergies, which adds execution risk and uncertainty around future earnings growth. [Earnings]
  
• SRG Global's strategy focuses significantly on organic growth and expanding through acquisitions, which might stretch management capacity and dilute focus, potentially impacting margins and earnings. [Net Margins, Earnings]
  
• The company cites being capital-light as an advantage; however, this could also signify underinvestment in key assets or infrastructure, potentially limiting long-term revenue generation. [Revenue]
  
• High levels of annuity/recurring earnings (80%) indicate a dependency on existing contracts, which, if not renewed or replaced with new business, may affect revenue stability as market conditions or client priorities change. [Revenue]
  
• The projected EBITDA margin improvement depends on maintaining a modest gearing ratio and strong cash flow, but potential challenges in integration and market volatility could alter these financial metrics. [Net Margins, Earnings]

Valuation

• The analysts have a consensus price target of A$1.368 for SRG Global based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.55, and the most bearish reporting a price target of just A$1.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.6 billion, earnings will come to A$62.3 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of A$1.46, the analyst price target of A$1.37 is 7.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.