AUSGROUP: FY2017 bottom line turnaround with greater project visibility

AusGroup's scaffolding access project. (Photo: Company) AusGroup's newly-appointed CEO Shane Kimpton discussed how the resource infrastructure services provider has been benefiting from projects by oil & gas majors in Australia at its FY2017 results briefing on Monday (28 August). The projects include the INPEX-operated Ichthys project, Shell's Prelude FLNG, as well as Chevron's Gorgon and Wheatstone projects. “Australia's resource sector is moving from the construction phase to the maintenance phase. Maintenance is my expertise and that's how I'm going to move AusGroup forward.” – Shane Kimpton  CEO (Photo by Sim Kih) The Group posted net profit of A$2.4 million for 4QFY2017 compared to a loss of A$165.5 million in 4QFY2016. 4QFY2017 was its third successive profitable quarter and brings its FY2017 net profit to A$4.6 million, compared to a loss of A$258.9 million for FY2016. The outlook is positive: On 23 August, AusGroup announced that AMJV, its joint venture with Meisei Industrial Co. Ltd, had secured a A$165 million contract for the INPEX-operated Ichthys LNG project by JKC Australia LNG Pty Ltd (“JKC”). The scope of work for the initial subcontract, awarded in 2014, has been increased to include further painting, surface protection, fireproofing and insulation works for the onshore facilities near Darwin in Australia. The Ichthys LNG Project is a joint venture between INPEX group companies (the operator), major partner Total, CPC Corporation Taiwan and the Australian subsidiaries of Tokyo Gas, Osaka Gas, Kansai Electric Power, JERA and Toho Gas. AusGroup had work-in-hand of A$419.6 million as at 30 June 2017.

For more info, refer to its FY2017 media release here.

Below is an excerpt of the replies provided by Mr Kimpton, Managing Director Eng Chiaw Koon and CFO Christian Johnstone to investor questions at the meeting.

“The debt to equity conversion that was completed on 30 June 2017 was a significant achievement. We are the first company in Singapore to successfully implement a high yield bond to equity conversion. The exercise reduced our debt by A$34.1m and improved our balance sheet position to A$23.3m," said Managing Director Eng Chiaw Koon.
(NextInsight file photo) Q: Why did your gross margin in 4QFY2017 narrow slightly (to 7.8%) compared to the previous quarter?

In 3QFY2017, we had a contract with an improved gross margin due to its closure. We make provisions for every contract before it is closed.

If the provisions are not utilized, we write them back when the contract is closed. Gross margin was steady for 1Q, 2Q, and 4Q compared to 3QFY2017, which increased due to the contract closure.

Q: What is the breakdown for your cost of sales?

We are a labour intensive business rather than a capital intensive business. About 70% of our cost is on labour. A relatively small portion is on raw materials. When we employ people, it is for a specific project. When that project is completed, we release the labour pool specific to that project from engagement.

Q: What’s behind the 4QFY2017 cash flow from operations (A$1.8 million vs 4Q2016 A$7.6 million)?

Previously, we had challenges in getting clients to reimburse costs arising from variation work in the appropriate timeframe.

Some of our contracts have payment terms of 45 days. We are changing our payment terms to be due within 21 days. We have made progress in our discussions with clients and our negotiations to convert their payment terms is coming to a closure.

During 4QFY2017, one of our major contracts was converted to be cost reimbursable. That will improve our cashflow going forward. Before the conversion, there was a build-up of claims because of the reactive nature of the work and the project was behind time. We will only see the benefit of the conversion from 1QFY2018.

“Our FY2017 gross margin of 10.3% is really strong performance. We achieved that because we had multiple projects. Our net asset position is now positive. We are in the right direction both operationally and in our financing structure," said CFO Christian Johnstone. 
(NextInsight file photo) Q: Your work-in-hand is now about A$420 million. How much of that do you expect to recognize as revenue by June 2018?

As a rule of thumb, about 70% of the work is delivered within one year of securing the contract.

Apart from that, part of our work-in-hand also reflects a long-term maintenance contract for Chevron. About 80% of that will be recognized in the current financial year.

Q: What is your revenue split between oil & gas and mining?

85% to 90% of our revenue comes from the oil & gas sector. About 10% to 15% is from mining. We probably need to balance that out as we go forward.

Q: What is your strategy for meeting your obligations for the A$110 million bond that will be due in October 2018?

The bond maturity date was extended from October 2016 to October 2018. It might get extended again to October 2019. One other option might be to convert the note to equity.