Engineering & Construction (E&C): Inflation brings opportunities and threats
December sees big end to the year—over $1bn in awards
December saw another big month of contract awards in the BP E&C Index, with over $1bn of awards estimated to have been reached for the 3rd time in the last 5 months. This continues a trend of higher contract activity, which has rebounded sharply from the COVID lockdown induced low of $56m in April 2020.
Currency debasement, stimulus to fuel a current of activity
With a recently heightened investor focus on a possible return of inflation as a result of currency debasement and stimulus measures, the impact on the E&C sector is likely to be a strong current of project activity. Currency debasement and stimulus measures are both likely to buoy commodity prices, which have generally seen strong increases in recent months. Infrastructure investment, which was already slated to be substantial in Australia, is now likely to receive even greater emphasis in an attempt to stimulate economies.
Gives all comers a chance to flourish, M&A to continue
The heightened level of activity that is likely to result from higher commodity prices and high levels of infrastructure activity, likely means that E&C contractors will experience an opportunity to significantly grow their order books in current and upcoming halves. This will give all contractors, including those who have recently struggled, including the likes of DCG, the chance to re-establish a strong base level of revenue. SRG is another such example, with the company recently increasing its FY21 profit guidance. The positive industry demand tailwinds, and relatively easy access to capital, are likely to ensure that M&A activity remains a recurring theme in 2021. December saw continued M&A activity with DOW divesting its Open Cut Mining West business to MLD, whilst CIM completed its 50% sale of Thiess.
Beware of the flipside, particularly given strong competition
Unfortunately currency debasement and stimulus activity also has consequences, with project costs likely to also be driven higher. Whether it be wages, construction inputs such as steel, or capital equipment, cost pressures are likely to increase. This is likely to place pressure on contractors with long-term agreements, and those undertaking fixed price construction projects. These pressures remain a risk to our Buy thesis for contractors such as GR Engineering, who despite having a strong revenue outlook, may see some margin pressures.
These risks are particularly elevated given that the tendering environment appears to remain competitive. This has resulted in margins contracting across the sector in recent halves. A microcosm of a further sign of potential market competitiveness is MND’s 1H21 contract awards, which were estimated to be the weakest since 2H18, despite plenty of activity in its core markets. On the flipside, contractors such as SRG, CVL and PGX have seen significant contract awards over the past ~6-12 months. With MND seen as having a strong risk management framework and tendering discipline, it may be losing out to competitors who continue to more aggressively tender, as they seek to significantly grow their revenue.
BP E&C Index ($100 at 1 January 2020 inception): Price at 31 December 2020: $76.64, 1-month return: -3.5%, return since inception: -23.4%
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Publishing independent, institutional grade economics research at Economics Uncovered: economicsuncoveredresearch.com
Follow me here on Livewire & on Twitter (twitter.com/steveanastasiou) to keep up-to-date with my latest thoughts & analysis.
........
The following may affect your legal rights. Important Disclaimer:
This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities
Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified
countries. In Hong Kong, this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong
Kong. In the United States, this research is issued and distributed by Bell Potter Securities (US) LLC which is a registered broker-dealer and member of FINRA. Any person receiving
this report from Bell Potter Securities (US) LLC and wishing to transact in any security described herein should do so with Bell Potter Securities (US) LLC.
This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific
client’s financial situation, particular needs and investment objectives (‘relevant personal circumstances’), a Bell Potter Securities Limited investment adviser (or the financial services
licensee, or the representative of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be made aware of your relevant
personal circumstances and consulted before any investment decision is made on the basis of this document.
While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the
document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information
contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations
contained in this document or for correcting any error or omission which may become apparent after the document has been issued.
Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising
in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise)
suffered by the recipient of this document or any other person.
Research Policies:
For Bell Potter’s Research Coverage Decision Making Process and Research Independence Policy, please refer to our company website:
https://bellpotter.com.au/research-independence-policy/
Disclosure of interest:
Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and
management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the
securities referred to in this document.
Steven Anastasiou, authoring analyst, holds a long position in MND.
ANALYST CERTIFICATION
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in
this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of
his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.
2 topics
20 stocks mentioned
Publishing independent, institutional grade economics research at Economics Uncovered: economicsuncoveredresearch.com Follow me here on Livewire & on Twitter (twitter.com/steveanastasiou) to keep up-to-date with my latest thoughts & analysis.
Publishing independent, institutional grade economics research at Economics Uncovered: economicsuncoveredresearch.com Follow me here on Livewire & on Twitter (twitter.com/steveanastasiou) to keep up-to-date with my latest thoughts & analysis.
Comments
Comments
Sign In or Join Free to comment