Excerpts from UOB KH's non-rated report
There have been glimpses of recovery for AusGroup following the delay of non-critical projects by clients during the fallout of the COVID-19 pandemic.
Longer-term contracts have been clinched with major multinational clients including ExxonMobil, Wesfarmers, BHP Billiton and Fortescue Metals Group.
Employee count - a leading indicator of revenue - has been on the rise back to almost pre-COVID-19 levels.
A major upswing potential lies in AusGroup’s ability to turn around its port business.
• Longer-term EPC contracts lay groundwork for revenue visibility. Established in 1989 and listed on the SGX in 2005, AusGroup has built up its strength and trusted ability as a service provider of fabrication, construction and integrated support services.
AusGroup serves the oil & gas, chemical and industrial sectors, as well as the mineral processing and iron ore industries in Australia.
During the fallout of business disruption from the COVID-19 pandemic in 4QFY20, AusGroup’s revenue decreased 49.4% yoy toA$37.9m, after clients postponed non-critical projects, which led to a 45% yoy drop in gross profit to A$11.5m.
Nevertheless, AusGroup clinched major three- and five-year term maintenance contracts with Wesfarmers and ExxonMobil in FY20, which would provide good revenue visibility for its engineering, procurement and construction (EPC) business.
• Glimpses of profit recovery. By 1QFY21, AusGroup has clawed back revenue of A$43.2m (-38% yoy, +13.9% qoq), and the continued rise in employee count (1,500 as at Dec 20; 2Q20 average: 1,616) would be a key signal that the group could be churning out 2QFY21 revenue close to 2QFY20’s.
The crux for AusGroup lies in the Northern Territory Port & Marine’s (NTPM) port business which it purchased for S$55m in 2014.
NTPM offers logistics and marine transport support services to the oil & gas and defense sectors, and has a 40-year remaining operating term at Port Melville and East Arm Supply base in Northern Territory, Australia.
However, the port business has been loss-making since its acquisition to the tune of A$6m each year, dragging normalised EPC earnings ofA$8m-10m to group normalised net profits of A$2m-4m each year between FY15 and FY20.
• In a bid to diversify deeper into commodities. To date, AusGroup has successfully completed the construction of two lithium plants for Talison Lithium and Tianqi Lithium in Western Australia.
The group has proven its capabilities in the lithium space, which is seeing increased investments due to rising demand for the commodity from the proliferation of electric vehicles.
In addition, AusGroup recently clinched a construction support services contract for Shoemaker-Levy, the largest ore body in First Quantum’s Ravensthorpe nickel project, a mine that has a long projected life of 32 years.
The group is also exposed to the iron ore and gold mining sectors and is striving to obtain more maintenance contracts to improve its revenue profile, compared to pure construction and capital projects targeted in the past.
• Awarding of more EPC contracts. On the back of recovery from the COVID-19 disruption, AusGroup could see its healthy pipeline of enquiries turn into fruition. Additionally, the awarding of longer-term contracts which offer a further trajectory inrevenue visibility would also provide more comfort for investors.
• Ability to turn around its port business. The most significant catalyst for AusGroup would be to generate sales within its port business. With the segment averaging net loss of A$5m-6m each year, any reduction would greatly improve the group’s earnings.
• Further revenue diversification. With AusGroup’s historical revenue and net profit highly correlated to the cyclical oil & gas sector, management’s ability to diversify the clientele it provides services to would be able to smooth out earnings volatility.