AusGroup

DMG & Partners Research, Aug 29

AUSGROUP's FY2013 revenue was 8 per cent lower than expectations at A$582.7 million (S$664.2 million), while profits tumbled 58 per cent to A$9.7 million, coming in 9 per cent below our forecast. If not for the sale of scaffolding in Q4 FY2013, AusGroup would have reported a loss for the quarter.

AusGroup has suffered two consecutive quarters of receivables buildup, which dragged its balance sheet from net cash to a 10 per cent net gearing. While the KML issue is showing signs of being resolved (change of chief executive and some progress payments), the low cash holdings have prompted management to omit giving dividend. We see a chance of an interim dividend when AusGroup collects KML's receivables in full and returns to net cash.

The minerals sector is slowing down. With most of the jobs in its major projects segment completed, AusGroup has little work left in this segment. While the oil-and-gas sector remains active, cost overruns have resulted in massive delays in order flow and cancellations of some projects. While the company's A$260 million orderbook will provide work for two more quarters, the downtrend in revenue and margins - combined with high operating leverage - will continue to pressure its bottomline for a few more quarters.

While the stock has retraced by 27 per cent since our downgrade in May, there is still room to fall due to softer earnings and a weakening Australian dollar, which may also dilute AusGroup's value to Singdollar-based owners. Our S$0.30 target price is pegged to 0.7 times FY2013 P/B, given that the cost of equity exceeds ROE. Risk-loving investors may buy into the ASX-listing angle, but we caution that the light at the end of the tunnel may be that from an oncoming train.

SELL