Smallcap Acrow Formwork & Construction upgrades FY23 guidance: Shaw & Partners initiates coverage with Buy

After witnessing the company’s stronger than expected start to the new financial year, Shaw and Partners has initiated coverage on little known smallcap Acrow Formwork and Construction Services (ASX: ACF) with a Buy (high risk) rating and an 85c target, which represents a 49% upside to the current price.

Despite having delivered a four-year compound annual growth rate of 23%, outpacing on returns and posting double-digit earnings growth, the broker reminds investors that Acrow is trading at a sharp discount to its peers at 9.39x.

Shaw is forecasting a full year FY23 dividend of 3.00 cents and EPS of 8.70 cents, and a full year FY24 dividend of 4.00 cents and EPS of 10.50 cents.

What does the company do?

To the uninitiated, Sydney-based Acrow is one of the country's largest specialist formwork and scaffolding providers.

The company also provides i-house engineering and industrial labour supply services to its construction sector clients.

Listed initially in 2008, and reverse-listed on the ASX in 2022, the company currently operates in 10 locations across Australia and owns over 60,000 tonnes of formwork and scaffolding products.

What happened in 1Q FY23

For the three months to September 2022, the company recorded a 32% increase in secured hire contracts on the previous period.

Management attributes strong year-to-date trading to:

• Continued strength in the civil construction formwork markets, across Qld, NSW, Victoria and WA.

• New contracts secured in the Jumpform business have commenced and are performing above initial expectations.

• Substantially improved hire rates being realised across the commercial scaffold business.

Commenting on today’s update, CEO Steven Boland notes activity levels continue to remain at extremely strong levels across the vast majority of business units.

“These factors coupled with the strength of our forward order book, brought about by our continued success in converting market opportunities to revenue, has given the Board the comfort to announce this upgrade to our FY23 guidance that will see the company enjoy another year of substantial growth.”

Improving metrics

Shaw believes the company’s improving metrics across the board, are directly wired to the positive outlook for the engineering and transport infrastructure sectors.

Late November management upgraded its FY23 guidance - sharply above consensus - after experiencing continued strong growth in secured hire contracts, a leading indicator for the business.

Management was originally projecting FY23 revenue to be in the range of $165m to $175m up 15% and underlying earnings (EBITD) of $43.0m to $44.0m up 20% on the previous year.

While the sales revenue guidance remains unchanged, due to the change in the sales mix, the higher sales contribution margin from the hire business results in an upgrade across underlying earnings (EBITDA), net profit (NPAT) and earnings per share (EPS) guidance of 6%, 7% and 8% respectively.

What happened at full year FY22?

Robust trading early in FY23 follows what was a strong FY22 result with the company reporting record sales revenue, earnings (EBITDA), and underlying NPAT, up 40%, 49%, and 104%, respectively.

Here are the other highlights

• The company paid a final dividend of 1.5 cents per share (60% franked) which took the full year dividend 2.7 cents per share (42% franked).

• All state markets reported improved performance on the previous year and this growth was achieved entirely from organic growth initiatives.

• During the year, net debt rose by $10.4m to $32.8m, primarily due to capital investment, and a one-off increase in working capital requirements.

• At FY22 the company delivered return on capital employed (ROCE) of 21.68% up 6.62% on the previous year.

What other brokers think

The company’s share price has seesawed 27% higher over 12 months.

Consensus is Strong Buy.

Based on Morningstar’s fair value of $0.68 the stock appears to be undervalued.

Following a strong 1Q update and with upgraded guidance showing ongoing momentum, Morgans forecasts FY23-25 earnings (EBITDA) increases of between 4-6%, raises the target to $0.84 from $0.80 and retains an Add rating.

Acrow Formwork and Construction Services share price over 12 months.