Small Caps | Dec 22 2022
This story features PERENTI LIMITED. For more info SHARE ANALYSIS: PRN
Perenti has pleased analysts with a second upgrade to full year guidance in five weeks, as the company benefits from successfully negotiating improved contract terms.
-Perenti issues its second guidance upgrade in just five weeks
-Improved contract terms allowed the company to upgrade full year revenue and earnings
-Brokers optimistic wider guidance range allows for further upside
By Danielle Austin
Upgrading guidance for the second time in five weeks, mining services company Perenti ((PRN)) is now targeting revenue of $2.7-2.9bn and earnings of $185-205m. At the midpoint, this reflects a 6% and 8% increase to the respective $2.6-2.7bn and $215-230m targets the company upgraded to in mid November. Perenti’s guidance upgrade also implies better margins, reflecting a return to pre-covid levels of 8.3-8.5%.
The latest upgrade comes off the back of Perenti securing better rates and terms across a number of its Australian and African projects, including some retrospective adjustments on complete work. The company highlighted these retrospective upgrades should provide fairly immediate benefit, and positively impact on first half performance. Contract wins at Evolution’s Ernest Henry and Regis’ Garden Well also supported the guidance upgrade, but the relatively small wins had less impact than rate adjustments.
The company continues to work towards its 2025 strategy, which targets revenue of $2.5bn, a 10% earnings margin, and a 20% return on average capital employed. Its near-term outlook remains strong, with more than 90% of FY23 revenue secured and a transition to tier 1 jurisdictions ongoing.
Brokers look to further upside potential
With Perenti commenting that its work outlook remains strong despite persisting labour challenges, Macquarie (Outperform, target price $1.40) is constructive on the near-term view. The broker finds work in hand of $6.5bn and a $8.5bn pipeline to be supported by an anticipated ramp-up and alleviation of headwinds moving forward.
Macquarie has matched its earnings and revenue forecasts to the midpoint of the updated guidance range, lifting earnings per share forecasts 9% and 5% for FY23 and FY24 respectively.
On the company’s 2025 targets, the broker expects the earnings goal will only be possible with the exit of underperforming contracts, as well as improvement to labour and covid-related costs, and a reduction in headwinds. Long-term, Macquarie expects Perenti to operate at an approximate 9% margin.
Having initiated coverage on Perenti in late November, Citi (Buy, target price $1.29) found the second upgrade to be more meaningful than the first, given it is driven purely by operational improvement. Further, the broker likes that a widening of the guidance range indicates increased upside potential, and feels subsequent upgrades could be forthcoming if Perenti proves able to continue achieving rate improvements.
While noting key in the near-to-medium term is negotiating favourable pricing outcomes with key customers, the broker finds all 2025 targets to now be achievable. The broker suggests the upgrade is indicative of Perenti’s ability to deliver ahead of expectations.
Finding the stock remains attractively valued following the recent upgrade, Canaccord Genuity (Buy, target price $1.39) feels upside potential to the new guidance range exists. The broker highlights guidance is yet to account for a twelve month contribution from Subika’s Newmont contract, or potential additional earnings from a new contract following completion in December.
The broker lifted its earnings estimates 8% and 5% for FY23 and FY24, and earnings per share estimates 11% and 6% for the same years, following the update. Canaccord also anticipates an earnings margin of 8.7% in FY23, but sees potential margin upside with the company targeting a 10% margin by 2025.
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