Excerpts from KGI report
|• FY2020 (YE June) was a challenging year for AusGroup as clients reduced work on their facilities in Australia. It reported a full-year loss of AU$59.5mn in FY2020, mainly from impairments of PPE and intangible assets.
• However, prospects are turning around. It recently reported a return to profitability for 2Q FY2021, and on 22 March 2021, announced that it was awarded a significant long-term maintenance contract by Chevron Australia.
• We think risk-reward is beginning to look attractive amid the mining boom in Australia and as the government continues to spend on infrastructure projects.
AusGroup is an Australian-based integrated solutions provider to the energy, mining, and industrial sectors. It provides maintenance, construction, access services, commissioning and handover and port & marine service.
Its maintenance service segment (e.g. the maintenance contract with Chevron Australia) typically accounts for a third of normalised revenue, while the remaining business is contributed from construction, fabrication, and access services.
Worst is over as activity picks up. Australia’s economy is growing faster than expected. After contracting 2.4% in 2020, Bloomberg consensus is forecasting Australia’s economy to grow by 4.4% in 2021 and 3.2% in 2022.
As a major commodity exporter, the country also stands to benefit if the global economy picks up.
Most recently, the IMF is projecting a stronger recovery for the global economy, and now expects the world economy to grow by 6.0% in 2021 and 4.4% in 2022, compared to its previous forecast of 5.5% and 4.2% respectively.
Tailwinds to provide a lift. The following developments in Australia’s mining and minerals sectors are positive for AusGroup’s prospects in the next 12-24 months.
|1) Major new LNG construction projects are now completed, and these have moved into the production phase, where maintenance services will be required to maintain safe and reliable operations for the next 40+ years, providing long term and sustainable demand for the group’s service offering.
2) Significant investment in the Resources sector (Iron Ore, Nickel, Gold, Lithium, etc) is continuing and the group is well placed to provide the sector with fabrication services, modularised solutions, SMP, construction, commissioning, and integrated asset maintenance services.
Order wins from long-term customer. Maintenance contracts form around a third of AusGroup’s normalised revenue, and hence provides a stable base compared to project-based works like construction and fabrication.
|On 22 March 2021, AusGroup announced a 10-year maintenance master contract with Chevron Australia. We estimate this contract alone should provide revenue of at least AU$100mn per annum.
Other project-related works should start to resume going into 2H21 as management has indicated that clients have largely delayed them since last year.
Valuation & Action: We expect earnings to recover going forward, with upside potential as it secures more projects and maintenance contracts.
However, while we are optimistic on its prospects, we note a key overhang over the value of its Port & Marine business, which accounted for 47% of non-current assets and 26% of total assets as at end 31 Dec 2020.
We will have to closely monitor the commercialisation of its Port & Marine business given that its auditors issued a disclaimer of opinion on its FY2020 financial statements.
This was mainly due to PPE and intangible assets worth AU$38.7mn related to the Port & Marine business. This business, fully operational since 2020, had to recognise AU$50mn of impairments in FY2020 due to a lack of activity amid the Covid-19 pandemic.
On a positive note, we understand that AusGroup has taken measures to commercialise this asset and we will likely see progress over the coming quarters, which should help to allay concerns over future potential impairments.
Risks: Margin pressure due to competition and lower-than-expected new order wins. Potential impairments if the group is unable to successfully commercialise its Port & Marine business.
Full report here.