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FGE - Forge Group

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notting said:
Yes, I found it rather odd sounding too. Hence the question.
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If the contract had a dispute on it, forge would be required to disclose it to the asx. The full yr report will outline any problem contracts, if there are any. What you may find is rio, invited the partners to bid for more work, and found forge to be too high compared to competitors. But what you find in the mining services industry, some times price, is overlooked a bit, becuase project delivery times are muc much more important, because missing those targets can sometimes cost 10 to 100 of millions in lost production
 
So i've had a quick flick through the preliminary final report for Forge, and firstly just want to say that they do a good job of giving all the necessary details both in written and graphical format, ESPECIALLY compared to other companies.

I've only had a quick look so couldn't tell precisely if the result was good, bad or on par. But on the face of it seemed to be on the about par area, maybe leaning towards good slightly due to contracts looking likely to increase which hopefully means EPS etc will continue to increase. They are also starting to build a mountain of cash which means acquisition doors will continue to open up, just hope they do find something in the short to medium term which will increase returns as i wouldn't like to just be earning interest rates on those funds for too long.

The new EPS and DPS figures give me a preliminary valuation of around $8.20 but i'd need to look at it more closely once i'm not at work.

Interested in the views of others, but I think given FGE's current price it is undervalued, but i'm a little worried that contract expansion may slow down, so hopefully they can make a value accreditive acquisition.

Thoughts?
 
kermit345 said:
just hope they do find something in the short to medium term which will increase returns as i wouldn't like to just be earning interest rates
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Organic growth tends to be healthier in the longer term than swallowing steriods.
A large project could require large funding, I'd prefer them to be showing patience and poise though there are plenty of bargains about at present!
Thanks for the update Kermi, it's helped me not forget about them.
 
The preliminary final report was coupled with an announcement of a $30 million contract win, which would (for obvious reasons) not figure in the report's figures.

Encouragingly, Forge managed to grow its order book by $50 million in the space of five months ($275 million at February 2011, compared to $325 million at July 2011).

I suppose one issue to be cautious about is the increasing cost of employing staff and contractors to fulfil Forge's orders. The increasing scarcity of skilled workers in the resources sector is no secret.

I have a value of roughly $10-$11/share, based on the figures released in the preliminary final report, but I would look to discount those a little bit to take into account rising costs in FY12. The report gives no guidance on Forge's expected performance in FY12.
 
great result. In particular, the worse performing company in the group webb construction, is starting to get some traction, with a couple of contract awards, and being short listed for some iron ore work, gold and copper work as well. Webb is setting up an office in south africa, which should see the tenders increase

I dont want fge to buy another company just for the sake of buying one. Its better if the money is keep in the bank because fge will have to overpay for any aquisition. Leave the war cheast in place so when another down turn occurs, which it always does. Fge will have the cash ready to aquire a business on the cheap. At the same time the money can be used for organic growth anyway
 
Looks like same old, same old from FGE, I am very happy with this result and many of my questions are being answered.

1) What are they going to do with all the cash?
Nothing!!
This is my favourite part, FGE is looking at acquisitions and have been for over a year now but refuse to overpay or buy something that is not a perfect fit, I wish corporate Australia would take note.
So it is more of the same for now - organic growth, with plenty of working capital in hand to fund major projects.

2) Is FGE going to ever win any larger contracts?
Maybe.
The Clough Forge entity being created seems to be a step in the right direction, and it if the first evidence on a positive from the CLO spp I have seen to date.

3) Is FGE growth slowing?
No
Plenty of work in hand, large order book and growth into Africa seems positive to me. The FGE hub concept seems to be working, FGE wins contracts through the entire cycle of a mines life and with customers like Lynas, BHP, Chevron, Woodside and Sandfire. FGE is definately getting a solid reputation in the industry.

Add to the above excellent; ROE, cash flow, solid growth and no net debt I am happy to hold FGE in both my SMSF and personal portfolio.
 
Interesting the company made no reference to the 100% increase in employee expense (from 31% to 37% of revenue). Has this been flagged previously?
 
McLovin said:
Interesting the company made no reference to the 100% increase in employee expense (from 31% to 37% of revenue). Has this been flagged previously?
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costs have been going up. Every other engineering company has had the same happen. Profit after tax is still 12% of revenue
 
adds4 said:
costs have been going up. Every other engineering company has had the same happen. Profit after tax is still 12% of revenue
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38,832/424,673 <> 12%. Net profit margin has contracted from 12% to 9%. If labour costs are rising, then why hasn't the company made some reference to that and outlined ways it is mitigating that effect (like being able to pass the cost on), or at the very least acknowledged it is occurring.

Is this expected to continue? I mean if you are sitting here this time next year and NPM has contracted a further 3 points, their going to need some serious headline growth to lift the bottom line.
 
The net profit margin in FY2009 was 9.2%. FY2008, 6.1%. Obviously we don't want to go back there, but it wouldn't be the end of the world, or Forge.

I haven't done a detailed analysis, but it is interesting to note that over the past three years, as a % of revenue the raw materials and consumables expense has gone right down, and the employee expense right up.

Also, since 2009, construction work revenue (Webb, Cimeco) has gone up 2.3x. Engineering work (Abesque) has gone up 5.3x, more than double the growth rate.

A greater % of Forge's revenue is coming from on paper design and engineering work, and a lesser % from actual construction. Which explains the shift in raw materials vs. employee expenses.

Nothing to worry about there IMO - it's all part of Forge's 'whole of life' strategy.
 

Thanks for the explanation. Would the decreasing raw materials cost be related to the growth in engineering and design or things like the strengthening AUD?

I don't think a NPM back at 6% would be the death of FGE, but many/most people have built valuations on current margins. Considering that margins are probably the most mean reverting ratio, are the current margins historically high or about average?
 
McLovin said:
Thanks for the explanation. Would the decreasing raw materials cost be related to the growth in engineering and design or things like the strengthening AUD?
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Both, but just off the top of my head without looking at any figures, I would expect the increase of the price of steel to offset any savings they would get from the high AUD.

McLovin said:
I don't think a NPM back at 6% would be the death of FGE, but many/most people have built valuations on current margins. Considering that margins are probably the most mean reverting ratio, are the current margins historically high or about average?
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2011: 9%
2010: 12%
2009: 9.2%
2008: 6.1%

Average, but that's only four points to go on. For better detail, you'd need to split it down to HYs, see how much they fluctuate.
 
Pretty big contract win (all but certain) for the Cimeco division. $200m...order book must be stacking up nicely now...
 
wow. A 200m contract from fmg. Thats like 50% of last yrs revenue. This share is going to rocket. The growth in revenue and contract values over the last few yrs is staggering. How do managment do it. Hope fge can maintain the profit margins on these bigger jobs
 

That is the big problem trying to maintain the profit margins especially on these big jobs.

I worked for UGL and am now working for another Perth based engineering company and I deal with the major projects on the SAP side helping the business with invoicing and month end processes and so many big projects turn to disaster for a variety of reasons.

The problem is that firstly management dont negotiate the terms of the contract very well with the customer. They promise and can't delivery and the customer has all sorts of KPIs built into the contract that make it difficult to manage the project.

Secondly it is hard to get the right people read expertise on the management side and on the admin side to manage these projects.

Hopefully FGE wont fall into the same trap as many of the other companies that i have worked for and they can successfully manage these bigger type projects.
 
i'm expecting margins to slip a bit on the larger contracts. What fge has advantage over other engineering companies is it owns all the equipment, so doesnt need to hire. It has low fixed costs, like admin, rents, corporate overheads etc. And a very capable workforce.

With the higher revenue, even with a slip in margins, fge will still increase profits significantly. And more importantly put more cashflow in the bank, so the war chest increases for an aquisition. I recon clough better watch out, because fge might swallow them. The profit margins at clough are only 5% compared to 10% for forge. Clough would have plenty of fat fge exec's could trim, and a skilled workforce that fge could use. Clough doesnt have the marine division anymore, so fge and clough are a better fit.

Once fge's p/e is more than cloughs. The takeover will happen, because it will be earnings accretative, and the investment community will be happy with the deal
 

I hope not I would not like to see FGE load up on debt or dilute the shareholders to swallow CLO.

On another subject I wonder where all that doom and gloom from earlier this month went.
 
robusta said:
I hope not I would not like to see FGE load up on debt or dilute the shareholders to swallow CLO.

On another subject I wonder where all that doom and gloom from earlier this month went.
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Sorry but clough is lining up fge for a takeover. A reverse takeover would be better for us because that means fge's board will control the merged company.

You dont have to take over a company with debt or cash, you can use script, or a compination of script and cash
 
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