AusGroup - RHB Securities 2015-09-01: Wandering The Deep Dark Woods.

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AUSGROUP LIMITED 5GJ.SI

Wandering The Deep Dark Woods. 

• AusGroup reported a breakeven 4QFY15, though core PATMI was a AUD6.2m loss after stripping out AUD22m of R&D tax credits and AUD15.5m of total impairments. 
• With both its focus industries – oil & gas and resources – in the doldrums, the company is far from being out of the woods. 
• Maintain NEUTRAL with a lower SGD0.11 TP (from SGD0.25, 4.3% downside) based on a 0.33x P/B (equivalent to 0.55x P/NTA). 

 4QFY15 missed. 

• The final quarter missed as revenue came in AUD13m below expectations, bringing the group’s reported PATMI to AUD0.3m vs AUD2.0m expectations. 
• No dividend was declared. 
• For the year, R&D tax credits totaled AUD34m, offset by AUD12m of WIP impairments. Going forward, R&D tax credits will only be at c.AUD7m/year. 

 More delays at the marine base. 

• AusGroup faced additional hurdles from the environmental agencies and we pushed back significant contributions from the marine base by another quarter to 3QFY16. 
• Our opinion on the marine base has not changed – in the near term, its contributions are unlikely to outweigh the c.AUD350-400m of annual revenues from AusGroup’s original construction/fabrication/maintenance businesses. 
• Investors are buying into not just a high-potential marine base, but also the existing businesses exerting a large operational drag. 

 Revenues likely to stay flat in FY16F. 

• With the persistent weakness in the oil & gas industry, where AusGroup has 90% of its current AUD467m orderbook, we believe the company will continue to face utilisation and margin weakness. 
• Our estimates already incorporate a healthy 13-15% gross margin for FY16-18F, but the high operational leverage (high Australian costs, increasing finance costs, etc.) means that the bottomline performance is likely to remain subdued. Under such circumstances, the stock appears fairly valued vs. peers. 

 A deep, dark forest. 

• AusGroup’s key focus industries are resources (mining, iron ore, etc.) and oil & gas, both of which are in deep cyclical downturns in Australia. It is far from being out of the woods. 
• Maintain Neutral with lower SGD0.11 TP based on 0.33x P/B (equivalent to 0.55x P/NTA), comparable with peers with ROE < Cost of Equity.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-09-01

NEUTRAL Maintain NEUTRAL 0.11 Down 0.25