Ausgroup Limted

UOBKayhian on 27 Sept 2012

Valuation
·      Investors should exercise caution after Ausgroup jumped 24.4% upon releasing a circular that it is seeking a listing on the Australian Securities Exchange (ASX). Currently, Ausgroup is trading at 8.15x FY12 PE, which is at a significant discount to its Australian and Singapore peers’ average of 14.0x. Such a listing will unlock value for current shareholders.
·      ASX is also the world's largest mining and resources exchange and this will help raise its profile within Australia, expand its client base and improve its ability to tender for large projects.
What’s New
·      The Board has agreed a de-merger of its subsidiaries into a group headed by its key subsidiary, AGC Australia Pty Ltd (AGC) and list the AGC on the Australian Securities Exchange. Management will also commence identification of a suitable asset to enable a reverse takeover of Ausgroup Limited so that it will remain listed on the Singapore Stock Exchange.
·      Upon completion of the transaction, current Ausgroup’s shareholders will receive shares in ASX-listed AGC under the distribution in-specie and still retain their shares in the Ausgroup. In our view, this would definitely boost the valuation of Ausgroup as it has been trading at a significant discount to its peers in Singapore and Australia.
·      A$324m orderbook should keep them busy for the rest of this year. Ausgroup has a strong track record in securing contracts and has won A$792m worth of projects in FY12. Despite the rate of success in tendering projects having declined from 50% to the current 20-25% due to increased competition, it still has an orderbook of A$324m as of 29 August that will be completed in the next 6-8 months.
·      Improved efficiency boosts bottom-line. NPAT jumped 88% yoy to A$23.3m despite a mere 5% increase in revenue. This is due to continuous efforts by management to increase productivity that led to a 2.7% improvement in EBIT margin to 6.1% in FY12. Going forward, Ausgroup is confident of maintaining EBIT margins at this level.
·      Momentum in the construction industry may slow down. Although a recent survey by the Australian Bureau of Statistics showed that private businesses plan to invest A$115.8b in the mining industry in 2012/13, we know that several projects are being put on hold or have been cancelled as demand from China is waning and banks are becoming less willing to lend. We are also cautious that the recent rebound in commodities prices will be able to spur capital expenditure going forward. The CRB index has gained 20% since the low made in June this year.