AusGroup (KimEng)

Background: AusGroup provides fabrication, manufacturing, construction and asset maintenance services for the natural resources sector such as iron ore, oil and gas, LNG and other mineral commodities. The company has a strong exposure in Western Australia.

Recent development: Since April, the stock has generated significant trading volume following management’s announcement for a possible secondary listing in Australia. The country accounts for 93% of its revenue generation. However, the uptrend was reversed with the sudden resignation of CEO John Sheridan. Mr Stuart Kenny, who owns 2.96% of the company, is the acting CEO in the meantime.

Our view:
Results show recovery. AusGroup’s 9M11 results showed improvement from FY10 with net profit up by 5.2% YoY to A$8.1m and revenue rising by 86.4% YoY to A$453.8m. This was boosted by higher revenue recognition with several projects reaching peak stages. However, the gross margins remained depressed at 8.8% and this trend could continue as the orderbook becomes depleted in the wake of the global crisis and keen competition in the region.

Boost for orderbook. AusGroup’s orderbook currently stands at A$288m, boosted by the recent award of a A$60m contract for the early works of Karara mining and another $50m from Chevron Australia to manufacture 7,500 tonnes of pip spools for Gorgon liquefied gas project, one of the world’s largest natural gas projects. The company is also bidding for the main contract for the Karara mining, which is estimated to worth A$200m. If successful, the tender results will be announced at end-4Q11. As the iron ore market in Australia is expected to stay robust in the next 12 months, there will be more opportunities for new contracts.

CEO steps down but business as usual. The sudden resignation of Mr Sheridan caused a selldown to S$0.39 (-7%) on the day of the announcement. Mr Kenny, the new acting CEO, is a veteran of the company, having held the positions of CEO and managing director for 10 years before taking a more behind-the-scenes role. The stock currently trades at historical PER of 18.8x and P/B of 1.0x.