Excerpts from analyst's report

RHB Research analyst: Lee Yue Jer, CFA

Port Melville Fuel FacilityPort Melville fuel facility: Photo: Company
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.

150 1Lee Yuejer"Although the orderbook stands at a still-healthy AUD389.9m, at such a margin (1.55%), 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." -- Lee Yue Jer, CFA (photo)


»  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.

Full report here.


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