Civmec, which provides heavy engineering and construction services, is seeing a turnaround as the worst of the pandemic, which disrupted the flow of supplies, manpower and projects, appears to be over.

For 1HFY2021 ended December 2020, the Australia-based firm reported revenue of A$306 million ($316 million) and earnings of A$15 million, nearly double the A$166 million revenue and A$8 million earnings reported for the same period a year earlier. The company, with listings on both the Australian and Singapore exchanges, also declared its very first interim dividend of A$0.01 per share.

From the recent low of 25 cents during the sell-off last March, Civmec’s Singapore-quoted shares have reflected the improvement, recovering to as high as 63 cents on March 2. It closed on May 4 at 52.5 cents, giving it a market value of $263.45 million. At this level, Civmec is trading at 10.5 times earnings.

Besides an improved operating environment, investors are cheering Civmec’s string of “significant contract wins” it had bagged in the first half of FY2021. One of the contracts was for the construction of over 13,500 tonnes of wharf girders and associated structures for the BHP Mitsubishi Alliance (BMA) at the Hay Point port in the state of Queensland; it was also tasked to build a 217m pedestrian bridge connecting the Queen Elizabeth II Medical Centre campus and Kings Park in Perth.

Various maintenance projects are also being carried out for clients across the country like iron ore producer Fortescue Metals Group, aluminium producer Alcoa, and energy giant Chevron, providing Civmec with a more stable earnings stream.

As at Jan 31, 2021, the company’s order book stood at A$1.15 billion. With an estimated client spend of more than A$500 billion over the next five years across the various sectors in which it operates, Civmec is aiming for more.

While the firm is known for playing a significant part in building some of Western Australia’s iconic structures such as the Perth Stadium and Elizabeth Quay, Civmec is also one of the few firms that have been selected to help build next-generation offshore patrol vessels (OPVs) for the Royal Australian Navy. These vessels are being built in the suburb of Henderson in Western Australia, where Civmec is headquartered.

Henderson is one of two manufacturing centres in Australia earmarked for the Australian government’s massive investment in naval shipbuilding and enjoys the proximity of just 10 kilometres to the Australian naval facility at Fleet Base West. The approved cost of acquiring 12 OPVs and associated support systems is estimated to be A$3.58 billion.

Of this figure, a A$1.98 billion contract for the build and design of the OPVs was signed by the Australian government in 2018 with prime contractor Luerssen Australia, a subsidiary of German shipbuilder Lürssen.

Patrick Tallon, CEO of Civmec, tells The Edge Singapore the company is very proud to win this OPV contract, as it is notoriously difficult to gain a foothold in the defence sector. “But if you have a proven quality product, you have a good opportunity for long term projects.”

Civmec’s share of the contract covers the supply of steel plates and piping for the first two of the new Arafura-class OPVs, being built by Luerssen Australia and its partner ASC. Civmec will then wholly build the remaining 10 vessels. These OPVs will replace Australia’s Armidale-class patrol boats.

HMAS Arafura, the lead vessel of its class, is scheduled to enter service next year. Once commissioned, it will take on border protection and maritime patrol missions alongside other regional partners of Australia. The third and fourth OPVs are under construction at Civmec’s facility at Henderson.

To provide a wider range of capabilities to its customers, Civmec has also added a so-called assembly and sustainment hall at its Henderson facility. It is the largest undercover modularisation and maintenance facility in Australia, enabling the company to build and maintain large vessels, as well as complex modules for equipment needed by its resources sector, which includes projects in mining and earthworks.

The hall can house large vessels, including Australia’s Air Warfare Destroyers, frigates and OPVs. At the moment, it is used for the construction of the OPVs, and while the maintenance contract of the OPVs has not been awarded, its management says the sustainment hall is capable of handling maintenance contracts.

Even with the capacity expansion, Civmec has managed to pare its debts notably. Total borrowings fell by more than a third to A$62 million in FY2020 from A$98 million the previous year. Net cash from operations rose to A$95 million from A$79 million over the same period.

From the perspective of Civmec’s executive chairman James Fitzgerald, the defence sector is a A$200 billion market opportunity over the next 30 years, and there’s “a massive amount of work ahead” for the company.

The Australian shipbuilding programme was initially set to cost about A$90 billion when their 2017 Naval Shipbuilding Plan was released but is now tipped to be well over A$100 billion as Australia seeks to ramp up its defence capabilities amid rising tensions in global geopolitics, according to its 2020 Force Structure Plan.

While Civmec could stand to benefit from geopolitics, the management team is careful to refrain from making their views known. As far as Civmec is concerned, such contracts are treated as any of the orders it wins in the marine and infrastructure sectors, and they are oblivious to whatever political aspects that are linked to these contracts. “To be honest, when we get projects to tender, if we think that we’re going to have a good shot of winning it, we will tender it,” says CEO Tallon.

Just last year, Australia released its 2020 Defence Strategic Update and 2020 Force Structure Plan, to help the country navigate what Prime Minister Scott Morrison has described as a “poorer, more dangerous and more disorderly” future.

The OPVs are also part of Australia’s commitment to a permanent naval shipbuilding industry. In its 2016 Defence White Paper, the Australian government said the strategy was centred on a long-term continuous build of surface warships in Australia, “involving the construction of our future frigates and offshore patrol vessels in Australia.”

Besides defence, Civmec is also betting that the boost in public infrastructure spending in Australia helps drive its business. According to Australian think tank Infrastructure Partnerships Australia, A$225 billion has been allocated for general government infrastructure funding over the four years to the government’s FY2023–FY2024 ending June 2024, up by around a quarter over previous years. “Although it’s not a very big part of the business in terms of revenue at the moment, we see that increasing,” says COO Kevin Deery.

Civmec is active in the oil and gas sector too. For example, the company is involved in Chevron’s Gorgon LNG plant as well as Woodside’s Energy’s Pluto LNG project. Despite the fashionable push to ditch fossil fuel and embrace renewable energy, Civmec does not believe the oil and gas industry will collapse overnight. “There’s going to be some years left till green energy comes to [modes of transportation] like aeroplanes and heavy haulage, and it’s still going to probably rely on hydrocarbon fuel,” says executive chairman Fitzergald.

He agrees that there will be a big push into wind and solar and that there is a “possibility” that Civmec can get into the offshore wind area. Furthermore, with hydrogen also being touted as an alternative fuel source, Deery says that Australia is in a good position to be a major hydrogen supplier as well. “They’re not green, but there are hydrogen plants in the country, usually attached to a fertilizer plant because that’s the start of the process, but it’s not a process that’s unfamiliar to us.”

Civmec’s management believes the way it is organised puts it in good stead versus other contractors. Unlike some other contractors who accept a contract, then start to hire various subcontractors to do bits and pieces of the work, Civmec prides itself on a turnkey solution, where it will largely handle the whole contract with its workers.

According to Tallon, the company does hire some subcontractors, but they are used for “specialised work” and on a short-term basis. Having a directly hired workforce also means that the company gets to build a “Civmec culture”, which translates into a workforce that “understands what we require, they deliver for us and our projects. So, it is very much a one-team kind of approach”.

Furthermore, he claims that there is significant client awareness about the benefits of a full turnkey offering. “More and more we’re seeing clients like the fact that they can come down to Henderson or Newcastle and see the product being built before it goes to the site, it’s very comforting,” says Tallon, adding that this had a greater impact during the pandemic. Fitzgerald adds, “The clients can come and do quality control checks and be satisfied that in a minute, it’s a good quality product. When you do it overseas, it’s a lot more difficult and with Covid-19, nearly impossible to go and visit and do your final checks. So, that’s been a massive advantage for us.”

In addition, Civmec is also largely immune to external supply chain shocks. Fitzgerald reveals that because the steel mills that supply Civmec are located in Australia, they were less affected by the pandemic. He adds that while there were some delays in materials being shipped from overseas, there was nothing “catastrophic”.

Furthermore, as Civmec’s projects are in Australia, Fitzgerald says the company’s projects did not suffer any significant delay as the company is probably the only major contractor to have its workshops in the continent. This was something that benefited both the clients and the company. “Clients appreciate that as well, that they can come to us and rely on us to get the projects out in time,” he says.

With an estimated A$500 billion of client spending coming up, the company’s management is confident it can win its fair share of this pie. “We’re a company that can handle any complex job, well, any job, complex or not, in any of the sectors that we work in,” says Fitzgerald.

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Civmec rides long-term spending on defence and public projects Down Under

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