AusGroup - RHB Invest 2015-11-02: The Worst Is Over But Valuations Remain High

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AUSGROUP LIMITED 5GJ.SI 

AusGroup - The Worst Is Over But Valuations Remain High

• With Port Melville now being able to begin commercial operations, the wait is finally over. 
• Maintain NEUTRAL, with a SGD0.15 TP (from SGD0.11, 4.5% downside) based on 0.75x P/NTA. 
• Our EPS forecasts are adjusted by -3%/13%/14% as we pencil in higher marine base earnings in FY17F(Jun)/FY18F. 
• We remain cautious, preferring not to overestimate the marine base growth as the Australian offshore oil & gas scene remains muted. 

 1QFY16 still at breakeven level. 

• AusGroup’s 1QFY16 PATMI of AUD0.3m was an improvement from its large core net loss in 4QFY15, but this took a 47% QoQ surge in revenue. On its AUD121m of engineering services revenue, the segment’s profit was only at AUD1.9m, implying a mere 1.55% net margin. 
• Although the orderbook stands at a still-healthy AUD389.9m, at such a margin, its value-add to the group is limited. 
• The company has finally secured the approval to operate the marine base commercially, which is a positive development. 

 Both core industries are facing headwinds. 

• AusGroup’s primary markets in mineral and energy are both still in the doldrums, and as it is operating in one of the highest labour-cost markets in the world, we do not expect the offshore industry to see a quick rebound. This may limit the near-term earnings growth of the marine base. 

 Cost-cutting measures necessary with c.AUD50m overheads. 

• With the consolidation of the marine base, AusGroup’s fixed costs are now in the AUD50m range, before financing costs. This essentially consumes 79% of our gross profit forecast for FY16F. Management is targeting cost cuts of up to AUD10m. 

 Better investment options out there. 

• While certain investors may like AusGroup for the high volatility of its stock and speculative action, we prefer companies with a stronger earnings base and higher cash flow and visibility. Names like Ezion (EZI SP, BUY, TP: SGD1.60) and Triyards (ETL SP, BUY, TP: SGD0.94) come to mind. Both trade at about 0.5x P/BVs and at 3-6x P/Es. 
• The investment thesis on AusGroup, in our view, remains premised on the marine base contributions overwhelming the low returns stemming from its lacklustre engineering services business.

Lee Yue Jer CFA RHB Research | http://www.rhbinvest.com.sg/ 2015-10-30

RHB Research SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.15 Up 0.11