Ausgroup Ltd - CEASING COVERAGE (CIMB)

S$0.33

Mkt.Cap: S$155m/US$125m

Oil & Gas - Equipment & Svs

Positive guidance intact

Ceasing coverage. We are ceasing coverage of Ausgroup due to a lack of institutional interest in the stock. Our last rating was Neutral; while our last target price was S$0.52, based on 10x CY 12 P/E, slightly above its Australian peers (9.3x).

Focus on execution... We recently caught up with Ausgroup’s Acting CEO, Stuart Kenny. Mr Kenny was CEO of the group for four years until Jan 08 and has been a non-executive director since. In all, there are no differences to the outlook painted by him and the ex-CEO. Mr Kenny stressed that business is as usual and the ex-CEO, John Sheridan, had left behind a strong operational team. The group had hired several senior project managers to provide more oversight in the execution process. Improvements in systems have also expedited reviews and facilitated the tighter control of projects. Lastly, in anticipation of a labour crunch from a high level of activities in Western Australia, management has beefed up recruitment and implemented worldwide recruitment programmes. As a result, Mr Kenny said that Ausgroup has grown to become one of the preferred contractors of mining giants, BHP Billiton and Rio Tinto.

… & rebuilding order book. With improved processes in place, the group is keen to rebuild its order book. 3Q11 order book was A$249m, with an estimated A$400m secured YTD, meeting our FY11 order target. Investors could possibly hear of a sizeable A$200m order from the Karara project by end-FY11.

Expect operational improvements. With the tighter control of projects and completion of two problematic construction projects (which had incurred losses due to execution issues) by end-FY11, the group expects a turnaround in margins. We had factored such an improvement into our forecasts. We also expect the group to collect some of the A$100m trade receivables in 4Q11 with the finalisation of the above problematic projects.

Dual-listing could catalyse share price. Ausgroup has set up a committee to explore a secondary listing on the ASX. We believe such a listing could catalyse the stock and lift Ausgroup’s valuations towards its peers’ average of 9x CY12 P/E. Ausgroup’s closest peers include Monadelphous, Rcr Tomlinson, WDS Ltd and VDM Group. Vdm Group is trading at 3x CY12 P/E due to hefty impairment losses; while Monadelphous is trading at a premium of 15x CY12 P/E due to its exceptional ROEs. With an anticipated turnaround and strong 3-year EPS CAGR of 30%, Ausgroup could possibly be re-rated to its peers’ average, at the least.