SRG Global (SRG) 86.5c – Trading Halt

It’s been a big 24 hours for SRG, releasing strong FY24 results, announcing an important acquisition, and launching an associated capital raise to fund it partially. We currently hold a 3% weighting in SRG for the Emerging Companies Portfolio, having trimmed it at 92.5c last month, though the series of events discussed below, has us firmly bullish on the stock;

• The Result: FY24 was a good year for the company and as MD David MacGeorge suggested yesterday, it’s a shame to be muddying the result with the acquisition and raise. FY24 saw revenue top $1bn, underpinning 23% growth in earnings before interest tax depreciation and amortisation (Ebitda). They have record work in hand of $3bn and increased their guidance for FY25 (post-acquisition) to be EBITDA of $125m, up 27% on FY24 and 15.7% ahead of current consensus expectations. They declared a 2.5cps fully franked dividend, and based on guidance, the yield for FY25 will be north of 6% fully franked. On less than 10x earnings, we expect SRG to do very well post equity raise.
• The Acquisition: SRG has bought Diona, a family-owned business that is a leader in water security and energy transition, two areas with significant growth ahead. They have agreed to pay $111m cash, and the deal will be 10% earnings accretive in year 1. This is a very good deal, and they’ve bought a high-quality business at a very attractive price, void of a competitive bidding process (they had exclusivity).  The combined group will do revenue of $1.28bn in FY25, ~70% of which is reoccurring, with EBIT margins increasing from 6.1% to 6.5%.
• Funding: $60m placement to professional investors (and wholesale clients) at 83cps, fully underwritten by Bell Potter. That’s a very slim 1.2% discount to the last price adjusted for the 2.5c dividend that new shares will not be entitled to. We like bigger discounts; however, we can understand why this was done at such a level, given the result and forward guidance. There will be an attached share purchase plan for holders, raising up to $6m at 83cps while they are using up to $65m of debt and existing cash.

We like this deal and believe they’ve paid an attractive price for a very good business.

Disclosure: Wholesale clients of James Gerrish participated in the Placement via Shaw and Partners. Shaw is a shareholder of Market Matters.