##{"id":58971,"date":"2011-10-11T09:58:21","date_gmt":"2011-10-10T22:58:21","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/10\/11\/unusual-gr-engineering-looks-strong\/"},"modified":"2011-10-11T09:58:21","modified_gmt":"2011-10-10T22:58:21","slug":"unusual-gr-engineering-looks-strong","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/10\/11\/unusual-gr-engineering-looks-strong\/","title":{"rendered":"Unusual GR Engineering Looks Strong"},"content":{"rendered":"

\n\t– GR<\/span> Engineering a small cap engineering and project management specialist
\n\t– Unusual business model offers advantages, according to Macquarie
\n\t– New contract wins mean most of forecast FY12<\/span> revenue in hand
\n\t– Macquarie retains Outperform rating<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tGR<\/span> Engineering ((GNG<\/span>)) is a Perth based company specialised<\/span> in engineering, project management, design and construction. With a market capitalisation<\/span> of a little under $300 million there is little attention paid to GR<\/span> Engineering by the broader market, as the FNArena<\/span> database shows only Macquarie offers coverage of the stock.<\/p>\n

\n\tMacquarie rates GR<\/span> Engineering as Outperform, attracted in part to what is seen as an unusual model for an engineering company. As Macquarie notes, GR<\/span> Engineering is mainly an EPC<\/span> or lump sum rather than an EPCM<\/span> or cost plus company in terms of how it contracts its business.<\/p>\n

\n\tIt is the stockbroker's view this means GR<\/span> Engineering has limited direct competition. It also gives management greater insight into cost, scheduling and design issues. This supports margins and return on equity, which Macquarie estimates were 19.9% in earnings before interest and tax terms for the former and better than 50% for the latter.<\/p>\n

\n\tThe business structure also makes GR<\/span> Engineering's capex<\/span> light, something Macquarie suggests should support a future dividend payout ratio of 50-60%. Low capex<\/span> requirements also means a solid financial position, Macquarie estimating net cash on balance sheet stands at around $35 million at present.<\/p>\n

\n\tGiven a positive outlook for capital spending in the gold and base metals sectors and geographic opportunities open to GR<\/span> Engineering, Macquarie expects solid earnings growth in coming years. Earnings per share (EPS) forecasts currently stand at 15.8c<\/span> for FY12<\/span> and 7.5% for FY13<\/span>.<\/p>\n

\n\tGR<\/span> Engineering on Friday announced $55 million in new work across three jobs, two in Australia and one in West Africa. Macquarie estimates this means almost all of expected revenue for FY12<\/span> of about $164 million is now in hand. EPS forecasts are unchanged as Macquarie had factored new contract wins into its numbers.<\/p>\n

\n\tEarnings estimates may yet prove conservative, as GR<\/span> Engineering is currently working on 25 studies, of which 10 are late stage studies. Macquarie estimates these late stage studies could convert into $900 million in EPC<\/span> work. <\/p>\n

\n\tThis is apart from the potential $360 million in work from the Moly<\/span> Mines project previously announced with China's CACS<\/span> Corporation. The solid medium-term growth potential for GR<\/span> Engineering from additional contract work is the other driver of Macquarie's positive view.<\/p>\n

\n\tShares in GR<\/span> Engineering have traded inside a trading range over the past year of $1.65 to $2.30.
\n\t <\/p>\n

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