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Forge Group wins major contract

Fresh from delivering a solid rise in its full year earnings and profit last week, Forge Group (ASX: FGE) announced this week that it had been awarded a $1.47 billion contract at the Roy Hill Iron Ore project in a joint venture with Spanish subcontractor Duro Felguera.

The contract, which will take the company’s order book from $1.3 billion to $2.1 billion, is for the engineering, procurement and construction of the processing facility at the Roy Hill Iron Ore mine in Western Australia. It is Forge’s largest contract to date and is expected to last two years.

The announcement comes after Forge delivered full year earnings for FY13 last week, reporting a 36% rise in earnings to $1.1 billion, and a 28% rise in profit to $62.9 million. The company also announced a fully franked final dividend of 8 cents per share, taking the yearly total to 18 cents, above the 14 cents per share in 2012.

The results were at the bottom end of guidance and resulted in the share price dropping over 10% on the day of release. In the days since, the share price has rebounded strongly to be 25% higher as of Tuesday.

Forge’s CEO David Simpson (previously of mining contractor UGL) was optimistic about the results and the coming year, noting that the company had performed well in poor market conditions and has maintained cash of over $103 million which will be used to pursue growth opportunities.

Forge was awarded $900 million in new contracts during 2013, and changes to group capabilities mean that it is now in a better position to compete for larger contracts. This has been seen immediately with the award of the Roy Hill contract.

Finally, the company has forecast a solid workload in Australia, and growth in its African and North American divisions in the next 12 months.

Foolish takeaway

Forge has a strong order book and has recently been awarded a new contract to undertake significant works at the Roy Hill Iron Ore mine in Western Australia. The company has a large cash balance and may be able to make bolt-on acquisitions in the near future.

Key risks for Forge are similar to many of the companies servicing the mining sector. A significant and sustained drop in the iron ore price, or a rise in the Australian dollar, will result in more capital expenditure being deferred and projects delayed. This may inhibit Forge’s ability to pay a dividend and grow earnings and profits. Forge may appeal to investors interested in exposure to the mining sector and willing to accept a higher level of risk and uncertainty.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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