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

Broker MA Moelis has pinpointed two ‘undervalued’ infrastructure-focused stocks it says offer plenty of upside for investors.

MA Moelis says electricity transition is likely to charge up GenPlus Group profits. Picture: iStock

MoneyTalks is Stockhead’s regular drill down into what stocks investors are pondering right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

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Broker MA Moelis has pinpointed two “undervalued’ stocks it says offer plenty of upside for investors.

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 its price on Tuesday of $1.20).

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

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The company’s core operating segments comprise of: 

• Infrastructure (69 per cent of FY23 revenue)
• Industrial Services (17 per cent of FY23 revenue)
• Communications (14 per cent of 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,” said 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 per cent CAGR from FY09-FY23, while successfully diversifying into the east coast at an equally impressive rate, to 34 per cent of FY23 revenue from 7 per cent in FY21.

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

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

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Moelis said the energy transition was now under way, with significant infrastructure projects at various stages of development in each state, and would 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,” it noted.

Duratec to ride defence spending momentum

MA Moelis has initiated coverage on Duratec (ASX:DUR), with a Buy rating.

It originally had set a $1.50 12-month target price, but DUR has since raced past that and on Tuesday at 1pm was trading at $1.60.

Moelis said it would soon review its target price.

The $400 million 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 more than 1173 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 said it liked the stock because Duratec’s defence asset maintenance work underpinned near term opportunities arising from Australia’s growing defence budget spend and re-established defence priority – with a potential $17 billion TAM (total addressable market).

“(Australia’s) defence spending as proportion of GDP will lift above current trajectory to be 0.2 per cent higher by 2032-33, or about $30 billion over six years beyond the forward estimates,” noted MA Moelis.

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The broker also said Duratec had 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 and 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.”.

MA Moelis added that Duratec was generating its revenues on a ready workforce, which enabled a favourable margin comparison against its peers.

As such, the broker believed DUR was undervalued.

“The stock trades at a 16 per cent discount to domestic peers,” it said.

“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.”

This content first appeared on stockhead.com.au

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Originally published as MoneyTalks: GenPlus ‘undervalued’, Duratec to benefit from rise in defence spending, says broker