Undervalued Ventia shares jump a quarter on IPO

Ventia Services Group (ASX:VNT) – Morningstar has given infrastructure services provider Ventia Services the thumbs-up following its recent listing on the ASX where it was downsized and re-priced at $1.70 a share due to an underwhelming response from the market.

Morningstar said ‘it must have been an embarrassing circumstance for the lead managers” after the offer size was reduced to $438 million, well under half the bottom-end of original range of $1.0 billion-$1.2 billion, which would have given a listing price of between $2.75 and $3.15.

Shares closed up 23.5% at $2.10 on their ASX debut on Friday after opening at $2.08, suggesting it may well have been under-priced in the end. Shares hit a high of $2.14. The issue price of $1.70 gives a market capitalisation of $1.45 billion as well as an EV/pro forma forecast 2022 EBITA of 7.9 times and an implied 2022 dividend yield of 8.9%. Shareholders Apollo Global Management and CIMIC Group called back 183.4m shares on the back of the repricing. They each currently own 47.1% of Ventia, which will fall to 32.8% after the IPO.

Morningstar analysts consider the stock undervalued despite its first day rise to $2.10, representing a 25% discount to Morningstar’s fair value of $2.80. The stock has been touted as a yield play because of its dividend payout ratio forecast of +80%.

Ventia was created in 2015 as the result of a three-way merger between Leighton’s Contractors Services division, Thiess Services and VisionStream. Ventia provides essential services to infrastructure work in Australia and New Zealand. The company operates across a broad range of sectors including: transport, telecommunications, utilities, defence, water, energy, resources and social infrastructure.

Here is a breakdown of the company’s forecast income for calendar year 2022:

• Approximately $4.9 billion of revenue.
• $405 million of earnings before interest, taxes, depreciation, and amortisation (EBITDA); and
• Net profit after tax of $149.8 million.
• The company is also forecasting a dividend yield of 8.9%.

Over calendar year 2020, the company earned $4.6 billion in revenue, of which 40% came from regional and rural areas. Australian revenue accounts for 85% with the remainder coming from New Zealand. Ventia believes it had a total addressable market worth $62 billion as of financial year 2021.

Morningstar says, “Ventia maintained fiscal 2021 NPAT guidance of $123m. The fair-value reduction simply reflected an increase in the number of shares on issue at completion to around $860m from the circa $770m noted in the original prospectus.”

Those that did get shares in the IPO ended up getting shares cheaper than expected, at roughly a 40% discount to Morningstar’s reduced fair value. The research house says “there is an annuity-style income to the investment proposition, with maintenance cash flows proving comparatively resilient to external shocks, and capital requirements typically favourably low. Ventia has long-term relationships with a diverse range of public and private sector clients with many having been maintained for decades.”

Morningstar gives four reasons to like Ventia:

1. Outsourced maintenance services are growing.
2. Ventia has strong relationships with a diverse customer base.
3. The company is capital-light.
4. Ventia earns most of its revenue via long term contracts with built-in mechanisms for raising prices.

Revenue is relatively stable and growing at a rate of 3.8%. This gives the company an attractive longer-term earnings growth prospect. Morningstar says, “Stable income is good news for dividends. Ventia is targeting a payout ratio of 60% to 80% of underlying net profits after tax and amortisation. Taylor forecasts dividend yield to rise from a partly franked 9.2% in 2022 to 10% fully franked by 2026.”

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.