Three Small-Cap Capital Goods Businesses: FBR, EMB, CVL

Summary

• Australia imported $5.84 billion worth of capital goods in April 2020.
• FBR has recorded a new high speed with its second construction robot, and improvements in the first robot have shown promising signs.
• Embelton has acquired assets of a small company, which was under administration, for a nominal amount.
• Civmec is building a new Submarine Rescue Service facility for the Australian Defence Force.

According to the Australian Bureau of Statistics, Australia’s balance of goods and services had a surplus of $8.8 billion in April, and the country imported capital goods of $5.84 billion, an increase of 4% or $243 million over March 2020.

In April, large-scale imports were recorded in machinery and industrial equipment, ADP equipment, and telecommunications equipment. APD equipment imports rose by $476 million over March 2020.

Capital goods are one of the important investments and factors of production in an economy. These include equipment and items used in the production of goods and services. Capital goods are utilised in the manufacturing sector of the economy, and capital goods industry also supports manufacturing jobs in an economy.

Thee small-cap capital goods businesses on ASX:

FBR Ltd (ASX:FBR)

FBR Ltd’s investors got rich at the beginning of this month, prompting price change query from ASX. The Company announced construction robot Hadrian X® clocked a new speed, laying more than 200 blocks per hour; this was also well received through widespread media coverage.

FBR also noted Federal Govt’s HomeBuilder grants worth $25k for eligible first home buyers and owner occupiers. To avail the grant, applicants must renovate an existing property or build a new one with the contract required to be signed between 4 June 2020 and 31 December 2020. HomeBuilder is expected to cost $680 million, but the cost will depend on take-up of the grants.

As part of its continuous improvement program, FBR’s second robot Hadrian X®, H02, achieved new top speed periodically during the testing. H02 has demonstrated increased laying rate across a full house, and top speed was around 300% faster than H01 in February 2019.

FBR believes that a sustained rate of 200 bricks per hour makes the new machine commercially competitive, while also depicting compelling case against the manual brick laying process. The Company is working to deliver same speed on highly complex structures for overseas markets and customers.

Meanwhile, H01 is going through upgrades in software and component that is expected to deliver better speed than H02. Early results of upgrades have depicted promising signs for the Company as well as partners engaged to ensure swift commercialisation. H02 would also continue to see improvements.

On 16 June 2020, FBR last traded at $0.046, up by 4.545% from the previous close. It has a market capitalisation of ~$79.11 million with approx. 1.8 billion shares outstanding. Over the past one month, the stock has delivered a return of +91.30%.

Embelton Limited (ASX:EMB)

In March, Embelton agreed to acquire assets of Omnifloor Australia, which was being run by administrators. The Company acquired assets for a nominal amount and offered employment to a majority of Omnifloor staff. EMB is also expected to complete the flooring projects that were earlier assigned to Omnifloor in Victoria and New South Wales.

For the 6-month period ended 31 December 2019, the Company paid 20 cents per share in interim dividend, franked at 30%. Revenue for the period was $34.23 million, up 7.3% from around $32 million in the previous corresponding period.

Its gross profit was lower at $9.33 million against $10 million in the previous corresponding period. Profit before income tax expense was $1.38 million as against $1.53 million in the same period previous year.

EMB delivered a net profit of $951k compared to $1.04 million in the previous corresponding period. Its commercial segment had a revenue share of $18.55 million, while merchandising constituted $15.52 million and manufacturing contributed $158k.

First half earnings were down 8.6% compared to the first half of prior year, primarily due to weaker wholesale results, which were impacted by lower AUD, weak market for home renovations, and increased competition.

In the second half, the Company expects to report better results compared to the same period last year, driven by solid order book and diversified portfolio. EMB has assumed improvement in resident building and better trading conditions for the second half.

EMB last traded at $10 on 4 June 2020, with a market capitalisation of ~$21.58 million with approx. 2.16 million shares outstanding. Over the past one month, the stock has delivered a return of -0.2%.

Civmec Limited (ASX:CVL)

Earlier this month, Civmec announced that it is building new Submarine Rescue Service facility, which would support Australian Marine Complex (AMC) to become a pre-eminent base for all Australian Defence Force and Alliance operations in the Indian Ocean.

CVL is committed to a long-term lease and construction of the new facility, which would be operated by Phoenix International under a sub-lease with Civmec. It is being developed in the close proximity to AMC’s Common User Facility at Henderson.

In May, the Company bagged contracts of Rio Tinto’s Mesa A operational hub in the Robe Valley. Rio’s Robe Valley Sustaining (RVS) iron ore project in Pilbara, Western Australia, requires further infrastructure development to support the operations at Mesa A and Mesa J.

CVL has bagged a range of work pertaining to the new contract with Rio. It would undertake fabrication at its Henderson facility and employ ~200 people. The Company will also need around 340 personnel for additional work. It has strengthened the partnership with Rio Tinto (ASX:RIO) and has a combined contract value of around $165 million.

In an Investor Presentation in May, the Company noted that contracted order book was $895 million as at 14 May 2020. It estimated book value of Property, Plant & Equipment (PPE) at around $264 million, after considering assets under construction.

The Company intends to focus on maximising utilisation of assets, plant and equipment to improve return on capital investment. CVL targets exceptional delivery across current resource projects and continue momentum in revenue and profits.

On 16 June 2020, CVL last traded at $0.390, down by 2.5% from the previous close. CVL has a market capitalisation of ~$200.4 million with approx. 501 million shares outstanding. Over the past one month, the stock has delivered a return of -2.44%.

(Note: All Currency in Australian Dollar unless otherwise specified)