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Wednesday, May 15, 2013

OSK-DMG downgrades AusGroup to 'sell' and 35-c target


Analyst: Lee Yue Jer

Fabrication facility of AusGroup in Australia. NextInsight file photoAusGroup reported a disappointing 3QFY13 results with a breakeven performance and a deteriorating order book. As our original turnaround thesis is undermined by the weak order flows and lackluster execution, we downgrade AusGroup to a SELL, TP SGD0.35, based on recent trough valuation of 0.77x FY14F book value.

AUD215m order book is less than two quarters’ work. At current run rates, AusGroup will run out of work within the year. The contract wins and better margins that were supposed to boost 3Q13 and 4Q13 results failed to materialise, and the downward march of the order book presents a dire outlook in the near term.

Slash FY13F/14F estimates by 54%/48%. With this quarter’s breakeven performance in sharp contrast against management guidance, we slash FY13F estimates by 54%. Core earnings are likely to stay weak through FY14 unless a large quantum of orders is won at once. Successful claims of the variation orders present upside to our FY14F estimates, while provisions on the Karara Mining receivables is the main downside risk.

Likely support near recent P/B trough. Earnings concerns are likely to dominate the relisting revaluation potential. Valuation is supported at the recent P/B trough of 0.77x which also corresponds to one standard deviation below its 5-year mean. We would become bottom-fishers around the 0.6x P/B range.

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