Australian Bowen Basin Expansion And Canadian Restructuring Will Strengthen Future Prospects

Key Takeaways

• Expansion and strategic acquisitions in Australia promise revenue growth and cash flow stability, driven by strong occupancy and long-term contracts.
  
• Canadian restructuring and new project initiatives, alongside capital returns to shareholders, aim to enhance margins, revenue, and EPS growth.
  
• Economic and political uncertainty in Canada and currency headwinds are negatively impacting Civeo's occupancy, revenue, and financial results, compounded by restructuring and asset sales.

Catalysts

Provides hospitality services to the natural resource industry in Canada, Australia, and the United States.

• Civeo's expansion strategy in Australia, backed by strong occupancy levels and a significant $1.4 billion contract, is expected to drive revenue growth in their integrated services business.
  
• The acquisition of 4 villages in the Australian Bowen Basin, anticipated to be immediately accretive to cash flow with long-term take-or-pay contracts, aims to secure steady sources of revenue and earnings.
  
• The potential ramp-up of additional Canadian LNG projects and carbon capture initiatives like the Pathways projects could lead to future growth in revenue and occupancy in Canada.
  
• Civeo’s restructuring efforts in Canada, including rightsizing and geographic diversification, are expected to improve net margins and strengthen results in the medium term.
  
• The share repurchase program, returning significant capital to shareholders, alongside maintaining a low debt profile, is anticipated to support EPS growth.

Civeo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Civeo's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.5% today to 4.4% in 3 years time.
• Analysts expect earnings to reach $31.0 million (and earnings per share of $2.33) by about April 2028, up from $-17.1 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 12.6x on those 2028 earnings, up from -15.6x today. This future PE is lower than the current PE for the US Commercial Services industry at 28.2x.
• Analysts expect the number of shares outstanding to decline by 6.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Civeo Future Earnings Per Share Growth

Risks

• Civeo is experiencing reduced customer spending and increased economic and political uncertainty in Canada, leading to decreased occupancy levels, which could continue to negatively impact revenue.
  
• The company has incurred onetime restructuring costs and is reducing overhead by 25% in Canada, indicating potential ongoing cost pressures and impacting net margins in the short term.
  
• The wind down of LNG-related activity and the sale of the McClelland Lake Lodge have contributed to a decrease in Canadian revenue, adversely affecting adjusted EBITDA and overall earnings.
  
• The weakening Australian and Canadian currency exchange rates are creating an EBITDA headwind, potentially impacting the company's US-dollar-denominated financial results.
  
• Political uncertainty in Canada is causing delays in new capital spending by customers, leading to a sustained reduction in Canadian occupancy and impacting future revenue projections.

Valuation

• The analysts have a consensus price target of $29.0 for Civeo 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 $700.9 million, earnings will come to $31.0 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of $19.62, the analyst price target of $29.0 is 32.3% 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.