AusGroup

DMG & Partners Research, Dec 18

WHILE AusGroup has sufficient cash today to meet its present needs due to the sale of its Singapore property in July 2013, the A$21 million (S$23.5 million) gross loss in Q1 2014 is a strong indicator of high ongoing cash burn. As such, we continue to see heightened insolvency risk compared with its healthier operating peers.

We understand that AusGroup is exploring options to raise cash for working capital purposes and a share placement is a likely choice. This will dilute the existing shares held by shareholders, but this may have been priced in after the share's recent sharp fall.

We also see risk to the company's book value owing to A$27 million in goodwill and intangible assets on its books today. If AusGroup continues to operate at a loss, the value of such intangibles may be impaired and a charge may have to be taken, further eroding its A$158 million book value.

AusGroup's A$219 million of orders on hand are insufficient to meet our A$323 million revenue forecast for FY2014 alone. We have also assumed a return to gross profits through the rest of FY2014, as well as a 10 per cent cut in overheads.

As these represent a fairly optimistic view, there is potential downside risk to our estimates.

Investors with high risk appetites may wish to start to bottom-fish for opportunities, although we caution more conservative investors to steer clear given the minuscule margin of safety.

AusGroup has fallen 61 per cent since we downgraded it to a "sell" in May 2013, but since most of the risks are priced in, we now upgrade the stock to "neutral", at a target price of S$0.18, pegged to 0.7 times FY2014 forecast NTA (net tangible assets).

NEUTRAL