Not all doom and gloom but there will be pricing pressure, says CEO John Sheridan. Photo by Sim Kih

ENERGY & RESOURCES engineering services provider AusGroup grew 1H09 revenues 28.8% yoy, driven by its Australian fabrication and construction service segment.

At a customer segment level, revenues from the oil & gas sector grew 108%.

”Demand will remain satisfactory, driven by Western Australian LNG projects,” said AusGroup’s managing director and CEO, John Sheridan at an analyst briefing this week.

Mr Sheridan then cited a market size of A$4.2 billion for the company’s engineering services in Australian oil & gas projects over the next 5-7 years.

Cost of sales increased by 34% to A$228.4 million, resulting in a gross margin squeeze of 3.4 percentage points to 12.3%.

The relatively higher cost of sales was due to

* outstanding variation claims; and
* increased depreciation charges as a result of a capacity expansion program carried out over the past 2 years, now largely completed.
”Organic growth is challenging, so our strategy is to grow via M&A,” said Mr Sheridan.

The company announced last Dec a senior executive appointment dedicated to identifying M&A opportunities in Eastern Australia and Southeast Asia.

Net profit attributable to shareholders was A$10.8 million, with net margins at 4.1%.
Cash flow from operations improved significantly, from a net outflow of A$8.9 million in 1H08 to a net inflow of A$33.4 million.

Capex largely completed, says CFO Anthony Hardwick. Photo by Sim Kih
The company repaid some A$23 million of loans, leases and hire purchases during the period under review with the following result:

* Total liabilities decreased by nearly half
* Gross gearing improved as result from 0.45 as at Jun 2008 to 0.19 as at Dec 08.
* Cash reserves also fell some 43% to A$10.7 million.

At the analyst briefing, I was very impressed with Mr Sheridan’s openness in discussing details on suspended or terminated projects.

Two such announcements were made during 1H09, the latest one being a notice of contract termination from Ausgroup’s Western Australian oil major client, Apache Energy.

The value of project work terminated in 1H09 amounted to about A$49 million, and brought AusGroup’s order book down to A$168 million.

Nevertheless, Mr Sheridan emphasized that this was in fact a deferral, as Apache Energy’s green field gas development at Devil’s Creek will supply gas for 25 years.

Below is a summary of questions raised at the briefing and the management’s answers.

Q: What kind of business are you looking to acquire?

A: Businesses that we can understand, that we can leverage on to strengthen existing business segments.
These may include distressed companies, as there could be more of these in 6-12 months.

Geographically, we are open but prefer it to be outside Western Australia.

Q: What acquisition size are you looking at?

A: We are currently working with banks to determine an acquisition amount that will not jeopardize our balance sheet.

Q: When will demand for mineral resources return?

A: AusGroup services global mining giants like BHP Billiton and Rio Tinto for engineering works at mines, ports and process plants.

We watch the capital expenditure decisions of these global mining giants rather than iron ore prices in China or steel demand.

We focus a lot on processing iron ore, which is straightforward – dig a hole, crush the rock and ship out.

Q: How was competition in the past 12 months?  Are there bigger players coming up or is there a disappearance of smaller players?

A: No change to the competitive environment has been observed due to a lack of tenders in 1H09.

We are expecting the usual suspects for BHP Billiton’s iron ore Rapid Growth Project (RGP) 5.BHP wants surety of delivery so they are strict on whom they allow to tender. 

Related story:
AUSGROUP wins A$30m vessel job


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