GCS – Global Construction Services Limited

The Anatomy of a Capital Raising
Global Construction Services Limited (ASX:GCS) is a supplier of construction-based products and services to a diverse range of companies operating in the resource, industrial, commercial and residential sectors.

The GCS Group currently offers scaffolding, formwork, material hoists, temporary site accommodation, chemical toilets, general plant hire and temporary fencing, together with related labour services.

GCS hires equipment to its customers and offers services such as design and engineering, the installation and dismantling of equipment, and delivery and pick up.  It also sells the full range of its products.

The company also acts as a sub-contractor to large construction and maintenance companies under long term agreements involving the provision of scaffolding and formwork for major projects, together with labour services that typically extend across the life of the projects.

The company announced a $32.2 million capital raising last week.

Does this business have a sustainable competitive advantage?
The company describes its competitive advantages as their ability to deliver personalised quality service, build strong relationships with clients and suppliers and ultimately meet customer requirements.  The company believes that this sets them apart from their competitors and ensures continued growth while meeting the changing needs of their clients.

GCS Group’s strategy for growth is to further establish its position in the Western Australian market and develop a presence in new sectors through a mix of organic and acquisitive growth.  The company has expanded its presence in other main cities around Australia.

The Company continues to explore opportunities throughout Australia as well as diversifying into related industries and sectors.

In executing this long term strategy GCS Group aims to establish a construction services company that provides a diverse range of products and services to construction industry customers and create value for shareholders.

What are the risks facing this business?
The main risk GCS Group faces comes from their strategy for growing by acquisition.  The reason why this is a risk is that the company has recorded negative cash flow in each of the last three financial years.  With poor cash flow coupled with a net debt level in excess of 40% after raising $32 million this month, the company is not currently in strong financial shape to be able to take on more acquisitions.  The risk is that any future acquisitions will likely be met with further capital raisings and dilution of the value of the business on a per share basis.

To demonstrate the point, the company has announced last week their desire to raise $32.2 million in order to:

  1. Pay down debt from acquisitions of hire assets, new operational sites and their Smartscaff joint venture
  2. Provide additional working capital

Is it run by able and trustworthy management?
The company boasts that they have in excess of 100 years experience in the industry with a dedicated management team that possesses extensive knowledge in the construction, scaffolding and formwork industries globally.

Is it trading at a bargain price?
Prior to the capital raising my metrics for the quality, debt level and valuation of the business looked like this.

Company Code Rank Net Debt to Equity 2011 Actual Valuation 2012 Actual Valuation Today’s Share Price Margin of Safety 2013 Forecast Valuation
Global Construction Services GCS Silver 3 63% $2.23 $1.50 $0.84 46% $1.55

After the capital raising, note the variances in the quality ranking, debt level and 2013 valuation metrics.  While debt levels go down after the capital raising, the profitability and valuation of the business is reduced on a per share basis.

Company Code Rank Net Debt to Equity 2011 Actual Valuation 2012 Actual Valuation Today’s Share Price Margin of Safety 2013 Forecast Valuation
Global Construction Services GCS Silver 4 41.8% $2.23 $1.50 $0.84 20% $1.05

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Here is a chart of the company’s share price performance over the past year.

In summary, Global Construction Services is a business growing its overall profit levels via acquisition.  While profit levels are growing, profitability is declining.  The business has experienced weak cash flow in the last three financial years and has a relatively high debt level despite raising capital.  Management is attempting to grow the business both organically and via further acquisitions.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Book Your Free Appointment
Simply fill in and submit the appointment booking form and Dean will be in contact with you shortly!