Turned around and still cheap

• Amongst the cheapest O& G plays at 5x FY13F PE

•

backlog potential upside from A$593m in the

pipelineFY13F to grow 28%, backed by A$324m order

• Offers 30% potential return to fair value of S$0.50

The Business

Leading engineering and construction services provider to the mining

and O& G industries in Western Australia. AusGroup fabricates,

constructs and installs structural steelwork and processing equipment

for the oil and gas (55% of FY12 sales) and mining (45%) industries.

Post installation, the firm also provides asset maintenance services

such as painting, insulation and scaffolding. AusGroup’s key

competitive advantage over peers is its comprehensive suite of

maintenance services.

Rising orderbook and margin improvement keep profits growing. A

rebound in its orderbook since 2HFY11 has led to more consistent

topline growth in the last two years. More importantly, the change in

focus on bottomline has resulted in steadily improving margins over

the last seven quarters. Based on an existing order backlog of

A$324m with another A$593m worth of contracts in bidding stages

and more new wins expected, we project FY13F earnings to grow

28% supported by margin improvement through better cost and

project management.

The Stock

Valuing AusGroup at S$0.50 per share. This implies 30% upside from

the current price. Our fair value is based on 8x FY13F earnings. This

valuation peg is at a 20% discount to sector average of 10x, given

that AusGroup is much smaller in size.

New contract wins to provide upside. AusGroup is well positioned to

benefit from the strong development of natural resources (eg.LNG) in

Australia and SEA as well as small-scale expansion/upgrading work in

the mining industries (iron ore). We believe stronger than expected

contract wins and consistent earnings delivery are key catalysts for a

stock re-rating.

Key risk. Earnings would take a hit if the company encounters cost

overruns or delays / difficulty in recovering claims for variation /

additional work done beyond the contracts. Contract wins could be

affected by slowing mining boom in Australia although AusGroup

has long term maintenance contracts to cushion the lull.