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Civmec: A success story in Australia’s heavy engineering industry

The Edge Singapore
The Edge Singapore • 9 min read
Civmec: A success story in Australia’s heavy engineering industry
Civmec chairman James Fitzgerald (left) and CEO Patrick Tallon. Both men founded Civmec in 2009. Photo: Civmec
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The last few financial years since FY2020 have been great for Civmec P9D -

as it delivered yet another record performance in FY2023.

In FY2023 ended June 30, Civmec reported a record NPAT of A$57.7 ($50 million), up 13.7% y-o-y. The company also posted a record ebitda of A$109.1 million, up 15.4% y-o-y. As at June 30, Civmec’s order book also grew by 10.6% y-o-y to a healthy A$1.15 billion.

When asked about the company’s secret to achieving steady revenue and earnings growth, Patrick Tallon, CEO and co-founder of Civmec, reveals that the company has been very focused on improving its bottom line — even more so than its top line — even though revenue growth is required to drive earnings.

“We committed to the market, some three, four years ago that we would deliver consistent profit margin … We look at what is sustainable for the business,” he says.

“It is possible to secure work but it’s how you deliver the projects that really matters. We look at jobs that suit our portfolio of disciplines, ensuring the correct people are available within the business and in the market to deliver safe and successful outcomes,” he adds.

In FY2019, Civmec reported a drop in its earnings to A$7.0 million while revenue fell to A$488.5 million.

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At the time, chairman James Fitzgerald attributed the revenue and earnings drop to “a year of consolidation”, which was “focused on the completion of several significant projects”.

According to Tallon, the company was also focused on building its new engineering facility in Henderson, Western Australia at that time. The new facility is said to be a “significant build” that cost the company “well in excess” of A$100 million.

“That was a period where we went through no growth in our revenue and margins were getting a little tighter. But it needs to be understood what we were doing at that time when it was harder [to grow] amid the global climate,” Tallon explains. “We felt that was the right time for us to be involved in internal infrastructure and people development and get ready for the next platform of growth. So, we built a very strong foundation for that next level of growth.”

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He adds: “In fairness, compared to our peers, we are doing better than the vast majority and certainly as good as the rest. We are really in a good solid strong position right now as a business and that’s ultimately due to hard work but also due to a lot of strategic positioning and making the decision to build this infrastructure to help us to be able to control the supply chain and make us more attractive to our clients overall.”

Becoming Australia’s largest

Civmec, which was established in 2009, is understood to be Australia’s largest heavy engineering company and is one of the country’s leading contractors with businesses in the energy, resources and infrastructure, marine and defence sectors.

“The model for Civmec was around being able to give full turnkey solutions in multiple disciplines and working across multiple sectors,” says Tallon, adding that it was a plan and a work in progress as the company steadily took on more disciplines that it did not initially have such as major fabrication projects and work for major liquefied natural gas (LNG) projects.

“Right now, I believe it would be very hard to find a company that has all the disciplines in-house and [is] doing exactly what we’re doing in Australia. It would be hard for clients to find a contractor that has extensive fabrication facilities and an in-house capability for doing civil concrete, fabrication, structural mechanical piping and electrical works,” he adds.

“But it doesn’t mean we don’t have strong competitors. However, there’s no real direct comparison,” he points out, adding that there is no other single contractor that can serve the range of in-house capabilities to customers that Civmec does.

These range from Australia’s federal government in key areas including defence and Main Roads Western Australia (WA) and Transport for New South Wales (NSW) for bridge infrastructure to energy giants such as Woodside and Chevron for subsea modules and major blue-chip miners such as Rio Tinto, BHP and Fortescue Metals Group (FMG) in resources projects.

Revenue goals

Among its business segments, Tallon sees the biggest area for immediate growth is in maintenance which contributed about 15% to Civmec’s total revenue in FY2023.

“We have extensive knowledge lots of the number of major projects and fabrication jobs,” he says, adding that the maintenance sector has the most immediate opportunity for growth. At present, Civmec has been taking on major projects worth up to A$500 million, but compared to its peers in the maintenance space, some of which generate revenue in maintenance above A$1 billion, we have a lot of room for growth, he points out.

Furthermore, Civmec has been performing well in the maintenance space, with the company seeing a doubling of revenues on a y-o-y in the sector. “It’s not too big a challenge to double revenues initially when the starting revenue number is low  but we do see growth for ourselves there and this will be enhanced following the completion of our development of a maintenance facility at Port Hedland, the primary port location for many of the large iron ore miners operating in the Pilbara of Western Australia .”

On the whole, Tallon aims to hit over A$1 billion in the company’s annual revenue “over the next couple of years”.

Currently, the company’s major projects — most of which are cyclical — generate about 80% of Civmec’s revenue. However, Tallon aims to reduce this weightage to 50%–60% and secure the rest from recurring revenue streams.

These include maintenance works as well as meeting the shipbuilding and sustainability defence requirements for the Australian Navy.

Meanwhile, due to the cyclical nature of the projects, Tallon reveals that the company has to try to ensure that larger projects get awarded at the right time, although this is something out of its control.

“We’ve been managing that quite well and we know the timings of the projects so far. However, clients can often get delays for an abundance of reasons that would range from environmental approvals to getting engineering deliverables issued. That has been one of the complexities of trying to consistently maintain a strong order book,” he says.

“We may have had an order book of around A$1 billion consistently but when you’re faced with winning an A$300 million job that the client may push out for a period, that can impact what you can report in your order book and can affect our forecasts, so timing is integral. As we grow our maintenance sector, which will include proactive well planned-out shutdowns in advance, we plan to be able to cope with peaks and troughs better and be able to have some clearer visibility looking ahead.”

He adds that the company’s multi-disciplinary nature means that they can work on a few projects at the same time.

“At this stage, having depth of maturity in the business and a proven delivery model mean we are probably more sought after now. Clients want to partner with us. But it doesn’t mean we can call the shots. It’s not about being complacent, but we do have stronger relationships and an understanding of each other’s requirements is better translated, often leading to more appropriate contract terms and conditions being included in the contracts we sign, for example … What’s unclear, we can clarify and we ensure the client is aware of the basis on which our estimate considers. At the end of the day, we just want to ensure we have everything we need to do a good job and ensure all stakeholders get a satisfactory outcome.”

That said, the CEO has stayed disciplined, which is to maintain bottom-line margins for his board and shareholders.

“To me, it’s all about net profits. It’s about what’s there to be delivered to our shareholders at the end of the year,” he says. “It is also important to me that we do whatever we can to keep our net profit margin (NPM) to at least above 5%. To be sure, 5% to 7% is a bracket that we’re comfortable with for the foreseeable future.”

He adds that even when the company embarks on a new venture, which may affect its growth trajectory for a period, overall, the board is “very hopeful and confident that we can keep our margins in the 5%–7% bracket over the foreseeable future”.

Steady dividends

When it comes to giving back to the company’s shareholders, Tallon is pragmatic in ensuring dividend payouts are sustainable. Since FY2020, Civmec’s dividend per share has grown steadily, with a total payout of 5 Australian cents in FY2023.

“We’ve had some good returns and it is always our intention to give back to our shareholders whilst we can and when we can. Over the previous years, we may have been considered to be conservative about what we’re able to give, but we have been in constant development and growth phases” he shares. “Going through significant areas of growth in new areas such as infrastructure and defence, all that costs money. At any given time, where there are operational requirements and the like, there may be a cash requirement for new projects and constraint for a specific project, milestone payments instead of progressive payments for example. We have to bear all these factors in mind when distributing dividends.”

He adds: “The whole idea is we want to be in a position to give some of the cashback to our shareholders, people who have stuck with us, and we’ll do so when we feel it is appropriate. However, we are also mindful that we don’t want to go backwards. We hope that we will maintain the dividends that we give, and we don’t want to have one-off spikes and end up returning to a lower dividend payout. At the same time, we need the flexibility for capital expenditures (capex) and operational requirements, and we need our shareholders to understand that.”

“At the end of the day, we try and give as much as we can but there is no point in giving a big dividend but we end up suffering from an operational constraint in taking in jobs. We are pragmatic in that,” he says.

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