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Is it time to buy Forge Group?

What is $1.3 billion in contracts really worth?

After the release of Forge Group’s (ASX: FGE) annual report, it seems the answer is: approximately $64 million — in profit.  For a company with 86 million shares on issue, this equates to a price-to-earnings ratio of only 5.67 at the time of this writing, making it at face value one of the cheaper companies on the ASX.

Forge Group had a very successful FY2013, with an increase in revenue of 36% and net profit after tax of 29%. After a wave of new contracts and acquisitions, including American construction and maintenance firm Taggart Global, Forge enters FY 2014 in great shape with more than $1.3 billion worth of contracts already on the order books – some $200 million more than its entire revenue from 2013.  If all goes to plan, Forge should see another increase in profit for 2014.

The company operates with the triple aim of ‘achieving business value through integration’ (owning multiple companies that all contract to each other; essentially keeping all revenues ‘in house’), ‘growing our global presence’, and achieving ‘zero TRIFR’ (Total Recordable Injury Frequency Rate).

Forge Group (all acquisitions are rebranded under the Forge banner) now operates in eight countries and provides clients with every aspect of engineering services from pre-project studies and construction right through to ongoing maintenance and operations contracts.

The icing on the cake is the fact that Forge takes a great interest in the safety and wellbeing of its employees, even going so far as to set up a counselling service to look after its FIFO workers. Some investors may get a warm fuzzy to learn that a company can be successful and still look after the little guy.

It has been a tough time for Australian engineering and mining service companies over the past 12 months – virtually every last one has seen a profit downgrade and its share price dive as the investment in mining infrastructure reaches its peak. Forge Group seems to have played its cards just right, with new revenue streams seeing the company’s growth safe for the next couple of years to the point where an improving economy and a number of sidelined projects (such as Hong Kong-listed miner MMG’s Dugald River mine) could potentially pick up the slack.

However, Forge is currently in a trading halt, awaiting the results of a review into underperformance on two of its power station projects. Forge has not provided any indication that its material guidance will be affected, however it seems logical that underperformance would lead to a reduced FY2014 revenue figure. It is doubtful though that any amount of underperformance will undo the contracts won in 2013 – Forge should still grow, just perhaps not as much as previously expected.

Foolish takeaway

So the question is – should you buy? Depending on your view of the construction industry as we head towards 2015, the answer appears to be a qualified ‘yes’. Forge has been kicking goals with both feet; however it currently carries $213 million in debt, which it is presumably paying with the income from its contracts. So if times dry up after 2015, Forge could shrivel also – bearing in mind its debt is several times larger than last year’s income.

As to its price, the market seems to be largely ignoring Forge recently, and it was valued around $4.20 before entering trading halt. If the announcement is mildly negative and the price dips, Forge may become even cheaper. Just make sure you read the announcement thoroughly before placing your orders!

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Motley Fool contributor Sean O’Neill owns shares in Forge.

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