MoneyTalks: GenPlus ‘undervalued’, Duratec to benefit from the rise in defence spending

MA Moelis has initiated coverage on electrical infrastructure service provider, GenusPlus Group (ASX:GNP), with a Buy rating and a 12-month target price of $1.56 (versus current price of $1.23).

The $220m market-capped GenPlus offers services covering the full power and communications infrastructure projects life-cycle, from design and engineering through commissioning, maintenance and decommissioning.

The company’s core operating segments comprise of: Infrastructure (69% FY23 revenue), Industrial Services (17% FY23 revenue), and Communications (14% FY23 revenue).

According to the broker, the Infrastructure segment has performed well recently as energy transition-related activity has increased.

The Industrial Services and Communication sectors are also experiencing turnarounds, and approaching an inflection point.

“Rewiring the nation presents a generational structural opportunity,” says the note from MA Moelis.

“Electrical transmission and distribution construction requires significant 10,000km addition to the transmission network.

“Coupled with the replacement of ageing assets, these demand drivers provide GNP with full cycle, long duration exposures to energy transition requirements…”

GenPlus has a strong west coast history with deep Tier 1 customer relationships to support its east coast expansion.

GNP has also demonstrated significant growth momentum, having grown revenue at a 55% CAGR from FY09-FY23, while successfully diversifying into the east coast at an equally impressive rate, to 34% of FY23 revenue from 7% in FY21.

“Combining its national presence with broad and deep expertise, GNP is well positioned in the full Power & Communications infrastructure project life-cycle to capitalise on the robust and long-dated demand tailwinds.”

“The rollout of 5G and ongoing expansion and maintenance of the NBN fibre network is also expected to drive demand through the medium-term.”

Meanwhile, the energy transition is now under way, with significant infrastructure projects at various stages of development in each state, and will drive sustained demand over a long term horizon.

“Significant recurring revenue in the order book and major contract awards underpin near term growth, with sustainable scale and turnaround execution to promote stable margin over the forecast horizon,” noted MA Moelis.

Duratec to ride defence spending momentum

MA Moelis has initiated coverage on Duratec (ASX:DUR), with a Buy rating and $1.50 12-month target price (the DUR stock price has recently surpassed that, trading at $1.58).

The $400m market-capped Duratec is a tech-enabled asset maintenance expert with defence and engineering credentials.

Headquartered in Wangara, WA, the business has a national footprint with a workforce of over 1,173 employees. The company’s expertise is in providing assessment, protection, remediation, and refurbishment services to a broad range of assets, especially steel and concrete infrastructure.

The broker says it likes the stock because Duratec’s defence asset maintenance work underpins near term opportunities arising from Australia’s growing defence budget spend and re-established defence priority – with a potential $17b TAM (total addressable market).

“[Australia’s] defence spending as proportion of GDP will lift above current trajectory to be 0.2% higher by 2032-33, or ~$30b over six years beyond the forward estimates,” noted MA Moelis.

The broker also believes Duratec has a growing and recurring maintenance order book in the mining and industrial sector, supported by an increasingly ageing infrastructure.

“Exploration, production and maintenance expenditure are all expected to increase in future years,” said the note from MA Moelis.

“Recent trends indicate increasing capex levels, with the Oil & Gas sector likely emerging from trough levels.

“Mining production facilities are exposed to weather conditions and corrosive environments, causing asset fatigue and reduction in structural integrity and safety, driving demand for maintenance services in the natural resources industry.

“Maintenance work in the order book is typically within 12 months, providing dynamic pricing opportunities and inflation hedging, balanced by longer term larger contracts,” said the broker.

MA Moelis adds that Duratec is generating its revenues on a ready workforce, which enables a favourable margin comparison against its peers.

As such, the broker believed DUR is undervalued.

“The stock trades at a 16% discount to domestic peers.”

“DUR offers strong earnings growth, defence specialisation, strong margin, and growing share in stable markets – with effective management of labour intensity – which in our view positions the business well to continue on its growth trajectory.”