Has volatility created a buying opportunity?
Duratec LTD (DUR. AX)
Market cap USD 163m
Australian infrastructure maintenance contractors.
Why I like this business:
· Strong founder led management with 3 founding members owning 10% each, and brilliant track record.
· Cheap Vs larger competitors 10pe vs 24pe.
· Lower risk and higher quality than competitors, with no construction business, only maintenance projects. They have reduced cyclicality due to DUR’s projects servicing clients’ maintenance capex rather than clients’ growth capex. Maintenace is always required, although non-urgent work can be postponed.
· Competitive advantage: they have a specialist consultancy that’s 100% owned and uses drones and bespoke software to map out maintenance projects for clients. Conversion rate of > 70% for clients to choose DUR to carry out the maintenance work following consultancy reports. No other competitor has this vertical integration / sales funnel.
· Balance sheet is clean with net cash and has had consistently strong revenue growth.
· Can easily see near-term upside of 100% and long runway for growth.
· Takes advantage of recent volatility caused by lower-than-expected order book, but with increasing pipeline and business reaffirming strong projections for the year.
Risks
· They have been rapidly growing the value of contracts with Defence (DoD), which now represents c.40% of revenue. If something were to go wrong in a big way, they could lose future work with DoD. I don’t think this is a big risk, but worth noting.
· Cyclicality – the business is by nature lumpy. They do a good job of spreading the risk by servicing different sectors, e.g. defence, buildings and facades, energy and mining. Maintenance projects are always needed. But the extent and timings will vary due to market conditions.
· Volatility - Newly listed small cap in Australia, means share price volatility expected. Also the free float is quite low with 20% owned by an Australian engineering company and 39% owned by management. So only c. 40% freely floating shares or c. $65m worth in todays’ market cap terms.
Why the opportunity exists:
A recent sell off following the H1 2024 report, which showed a relatively small reduction in order book. However their pipeline has increased, and order book fluctuation should be expected.
It’s a newly listed small cap with little institutional following and largely owned by retail investors, due to the size of the business. This makes it more volatile and therefore large swings are more likely on good and bad news.
Fundamentally the business is unchanged from the recent report in February 2024, and management has since reaffirmed strong guidance for FY24 revenues.
Sohra Peak Capital cover the reasons for this sell off and why it’s simply a short sighted market reaction, in their Q1 2024 quarterly report. See link below.
Summary:
Very well run founder led infrastructure maintenance business in Australia. It’s been growing fast since 2010 and cheap vs larger peers.
It’s lower risk / higher quality due to the makeup of the business. Competitive advantage with inhouse consultancy that acts as new business funnel and potential for consultancy to expand internationally, and make use of it’s vast data with AI.
I see this easily doubling in the next 18 months, and has a long runway for growth following that.
Due to the nature of the business, increased size and reputation help it win more business and open new doors.
I’d classify this aa quality compounder with excellent management, that has recently experienced some share price volatility that can act as an entry point.
Research
I found this business via a bespoke screen. After looking it up I found a writeup by Sohra Peak Capital. Their research is excellent. I’ve highly admired their work for a while now. For further details on the business I recommend reading their writeup: Sohra-Peak-Capital-Partners-Duratec-Ltd.-Investment-Memorandum.pdf (sohrapeakcapital.com)
Link to Sohra Peak Q1 2024 Letter:
Disclaimer:
Nothing here is investment advice. It is purely a way of me gathering my thoughts and sharing them to obtain feedback on an investment idea.
Myself and others I advise hold equity in this business. This letter was originally written for my investment partners, but I’ve opened it up to the public to gain feedback and act as a potential primer for anyone interested in this business.
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