Results Review, 1 September 2014

Ausgroup (AUSG SP)

Sell (Maintained)

Energy & Petrochemicals - Oil & Gas Services Market Cap: USD218m

Target Price: Price:

SGD0.38 SGD0.42 Macro Risks

A Hard Look At Numbers And Valuations

Growth Value

Ausgroup (AUSG SP) Relative to Straits Times Index (RHS)

0.54

160

0.49

145

0.44

130

0.39

115

0.34

100

0.29

85

0.24

70

0.19

55

0.14 180 160 140 120 100 80 60 40 20

40



Jul-14

May-14

Mar-14

Dec-13

Oct-13

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Share outstanding (m) Shareholders (%)

2.30m/1.84m -9.5 -10.2 0.18 - 0.51 90 648

Ezion Holdings Wang Yu Huei

6.2 5.6

Share Performance (%)





Not yet out of the woods. AusGroup’s 4Q14 gross margin was 11.1%, weaker than 3Q14’s 11.9% even though revenue grew 15% q-o-q. The company would have reported a net loss of c.AUD2.2m if not for a gain on asset sales of AUD5.6m. The orderbook has recovered to AUD376m, which should help to boost FY15F core revenue to our forecast AUD445m. On this topline, we expect this business to earn only c.AUD5m, or a 2.5% net margin going forward as the operating environment in Australia continues to worsen with increasing price competition and escalating labour costs. Optimistic assumptions for marine base. We pencil in AUD40m/84m/94m of revenue contributions from the marine base for FY15-17F with a 25% gross margin. We assume zero additional overheads, with all the gross profit flowing to the bottomline after 30% taxes. Running hard in the same spot. Even with the rather aggressive assumptions for the marine base, we find that the 35% increase in the number of shares in FY14 and a likely additional 18% in FY15 could dilute earnings growth in EPS terms. The stock is already pricing a full recovery to a record AUD25m bottomline, trading at 11x FY16/17F P/E. Buy Ezion for exposure to marine base business. After it exercises its 110m options, Ezion (EZI SP, BUY, TP SGD3.00) will own c.19% of AusGroup. We note a strong correlation in AusGroup and Ezion’s share prices recently, which we find unwarranted as the marine base should only make up c.15% of AusGroup’s revenues. In the meantime, Ezion is trading at only 7x Dec-15 P/E, while AusGroup trades at 17/11x June15/16F P/E. We value AusGroup at 10x FY16F P/E, resulting in a slightly raised SGD0.38 TP (from SGD0.35). Maintain SELL.

YTD

1m

3m

6m

12m

Absolute

122.2

(3.5)

(9.7)

68.0

27.3

Forecasts and Valuations

Jun-13

Jun-14

Jun-15F

Jun-16F

Relative

116.7

(3.2)

(11.8)

60.6

16.1

Total turnover (AUDm)

583

302

485

572

595

Reported net profit (AUDm)

9.7

(11.9)

15.3

24.9

25.9

15.3

24.9

25.9

Shariah compliant

Recurring net profit (AUDm) Recurring net profit growth (%)

Lee Yue Jer, CFA +65 6232 3898 [email protected]

Recurring EPS (AUD) DPS (AUD)

9.7

(11.9)

(58.4)

(222.3)

0.02

(0.02)

0.000

0.000

Recurring P/E (x)

17.8

P/B (x)

1.00

P/CF (x) Dividend Yield (%) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (adjusted) (%)

See important disclosures at the end of this report

  3  . 3 0 . 1

0 0 . 1 0 0 AusGroup’s 4Q14 results were weak with a core loss of c.AUD2.2m. . 0 Going forward, an operational recovery may be in the works with a 0 relatively healthy AUD376m orderbook. However, with the 35% dilution 0 from the two placements this year plus a likely 18% dilution from outstanding options, the stock is already priced at 17x FY15F P/E, using optimistic assumptions. Maintain SELL with SGD0.38 TP (from SGD0.35) pegged to 10x FY16F P/E.

 Aug-13

Vol m

Price Close

   

Source: Company data, OSK-DMG

na 0.0 5.76

na 1.19 na 0.0 na

5.8

(6.4)

10.6

net cash

na

Jun-17F

62.5

3.8

0.02

0.03

0.03

0.004

0.006

0.007

16.6

11.1

10.8

1.11

1.02

0.95

15.6

7.8

na 1.1

1.8

1.8

7.57

5.66

5.09

6.9 net cash 0.0

9.5 net cash 0.0

Powered by EFATM Platform

9.1 net cash 0.0

1

Ausgroup (AUSG SP) 1 September 2014

Additional Notes Figure 1: Quarterly results in review Figures in AUD'000 Revenue

Cost of sales Gross profit Other income Other operating costs Administrative expenses Marketing, distribution expenses Share of profit/(loss) from JV Profit from operations Finance costs Profit before tax Income tax expense Minority interest PATMI Exceptional gains / (losses) Core PATMI Gross Margin

EBITDA Margin Net Margin

4Q13 137,576

3Q14 73,044

4Q14 84,149

q-o-q 15%

y-o-y -39%

(123,132) 14,444 1,556

(64,319) 8,725 846

(74,826) 9,323 7,255

16% 7% nm

-39% -35% nm

(4,009) (6,865) (983) (1,005) 3,138 (2,370) 768 (243) 0 525 804 (279)

(2,838) (6,549) (823) 0 (639) (589) (1,228) (67) 0 (1,295) 552 (1,847)

(5,009) (7,008) (242) 0 4,319 (556) 3,763 (1,518) 0 2,245 4,472 (2,227)

76% 7% -71% nm nm -6% nm nm nm nm

25% 2% -75% -100% 38% -77% nm nm nm nm

21%

nm

10.5%

11.9%

11.1%

4.4% 0.4%

0.9% -1.8%

7.7% 2.7%

Remarks Lower activity in mining sector in Australia. Of the AUD376m orderbook, <3% are in the Projects segment, with 82% being in the Integrated Services segment and 15% in the Fabrication division. Expecting c.AUD400m-500m going forward.

Included AUD5.6m of asset sale gains in 4Q14.

Refinanced in FY14 and overall lower borrowings by end-FY14.

Gains on asset sales, less 30% tax. Still in core loss position. All three segments operating in the 8-12% gross margin range. The Projects segment is at greater risk of margin decline given the weak orderbook, but this may be mitigated by a strong Integrated Services segment.

Source: Company data, OSK-DMG

Figure 2: Annual results in review Figures in AUD'000 Major Projects Fabrication & Manufacturing Integrated Services Revenue Cost of sales Gross profit Other income

Other operating costs Administrative expenses Marketing, distribution expenses Share of profit / (loss) from JV Profit from operations Finance costs Profit before tax Income tax expense Minority interest PATMI Exceptional gains / (losses) Core PATMI

Gross Margin EBITDA Margin Net Margin

FY13 267,891 154,709 160,106 582,706 (519,218) 63,488 3,945

FY14 33,163 129,578 139,706 302,447 (297,503) 4,944 21,357

y-o-y -88% -16% -13% -48% -43% -92% nm

Remarks Fall almost entirely attributable to the weaker mining sector in Australia. Slow order wins in FY14. Slow order wins in FY14.

(21,927) (25,058)

(17,954) (25,995)

-18% 4%

Due to restructuring and cost-saving initiatives as well as lower activity levels. Wrote off costs related to ASX listing of AUD1.9m, plus refinancing costs and higher amortisation charges relating to the company's new entreprise resource planning (ERP) system.

(2,705) 524 18,267 (3,982) 14,285 (4,576) 0 9,709 1,574 8,135

(2,162) 0 (19,810) (3,442) (23,252) 11,381 0 (11,871) 11,943 (23,814)

-20% -100% nm -14% nm nm nm nm nm nm

10.9% 5.4% 3.4%

1.6% 4.3% 1.8%

AUD26.4m write-downs in 1Q14 due to additional costs to complete projects. Gain on sale of property of AUD14.8m and gain on sale of scaffolding and fixed assets of AUD4.2m in FY14.

Lower hedging costs, lower bank guarantee costs and overall lower level of borrowings.

Compound effect of additional costs in FY14 plus negative effect of operational leverage following sharp revenue fall.

Source: Company data, OSK-DMG

See important disclosures at the end of this report

2

Ausgroup (AUSG SP) 1 September 2014

Financial Exhibits Profit & Loss (AUDm)

Jun-13

Jun-14

Jun-15F

Jun-16F

Total turnover

583

302

485

572

595

Cost of sales

(519)

(298)

(424)

(495)

(515)

Gross profit Gen & admin expenses

Jun-17F

63

5

61

77

81

(25)

(26)

(28)

(29)

(31)

Selling expenses

(3)

(2)

(2)

(2)

(2)

(18)

3

(12)

(13)

(14)

Operating profit

18

(20)

18

32

33

Operating EBITDA

33

(6)

33

47

49

(13)

(11)

(11)

(12)

(12)

Other operating costs

Depreciation of fixed assets Amortisation of intangible assets

(3)

(4)

(4)

(4)

(4)

Operating EBIT

18

(20)

18

32

33

Net income from investments

1

-

-

-

-

Interest expense

(4)

(3)

(1)

(1)

(1)

Pre-tax profit

14

(23)

17

31

32

Taxation

(5)

11

(2)

(6)

(6)

Profit after tax & minorities

10

(12)

15

25

26

Reported net profit

10

(12)

15

25

26

Recurring net profit

10

(12)

15

25

26

Source: Company data, OSK-DMG

Cash flow (AUDm)

Jun-15F

Jun-16F

Jun-17F

Operating profit

18

(20)

18

32

33

Depreciation & amortisation

15

14

15

15

16

(41)

(5)

(30)

(22)

(4)

(20)

-

-

(12)

(30)

1

1

Change in working capital

Jun-13

Other operating cash flow Operating cash flow Interest received Interest paid

Jun-14

2 -

(6) -

25 -

43 -

(4)

(3)

(1)

(1)

Tax paid

(12)

(3)

(2)

(6)

(6)

Cash flow from operations

(27)

(36)

(1)

18

36

Capex

(10)

(5)

(5)

(13)

(14)

(4)

45

(47)

-

-

(14)

41

(52)

(13)

Other investing cash flow Cash flow from investing activities Dividends paid

(4)

-

-

Shares repurchased

(2)

-

-

Proceeds from issue of shares Increase in debt Other financing cash flow

(14)

(3) -

0

35

21

(7)

-

-

0

-

-

-

(1)

37

(5) -

3

3 -

Cash flow from financing activities

16

28

37

(1)

(2)

Cash at beginning of period

33

12

41

26

30

Total cash generated

(26)

33

(15)

Forex effects

1

(0)

-

Implied cash at end of period

8

44

26

4 30

20 50

Source: Company data, OSK-DMG

See important disclosures at the end of this report

3

Ausgroup (AUSG SP) 1 September 2014

Financial Exhibits Balance Sheet (AUDm) Total cash and equivalents

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

12

41

26

30

50

2

6

9

11

11

168

151

212

251

261

Inventories Accounts receivable Other current assets

19

0

0

0

0

Total current assets

201

198

247

292

322

Tangible fixed assets

76

61

85

86

88

Intangible assets

27

24

38

34

30

Total other assets

2

18

18

18

18

Total non-current assets

105

103

141

138

136

Total assets

458

306

301

388

430

Short-term debt

30

2

2

2

2

Accounts payable

84

70

105

122

127

Other current liabilities

13

12

12

12

12

Total current liabilities

127

84

118

136

141

Total long-term debt

-

18

18

18

18

Other liabilities

5

3

3

3

3

Total non-current liabilities

5

21

21

21

21

133

105

139

157

162

64

100

137

140

142

104

92

108

129

150

5

4

4

4

4

Shareholders' equity

173

196

249

273

297

Total equity

173

196

249

273

297

Total liabilities & equity

306

301

388

430

458

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

(7.8)

(48.1)

60.2

18.1

4.0

Operating profit growth (%)

(49.3)

(211.6)

0.0

74.7

4.2

Net profit growth (%)

(58.4)

(222.3)

0.0

62.5

3.8

EPS growth (%)

(58.9)

(212.1)

0.0

49.0

2.6

Bv per share growth (%)

5.5

(16.0)

7.2

8.5

7.4

Operating margin (%)

3.0

(6.5)

3.8

5.6

5.6

Net profit margin (%)

1.7

(3.9)

3.2

4.4

4.3

Return on average assets (%)

3.3

(3.9)

4.4

6.1

5.8

Return on average equity (%)

5.8

(6.4)

6.9

9.5

9.1

10.6

(10.8)

(2.4)

(3.7)

(10.2)

Total liabilities Share capital Retained earnings reserve Other reserves

Source: Company data, OSK-DMG

Key Ratios (AUD) Revenue growth (%)

Net debt to equity (%) DPS

0.000

0.000

0.004

0.006

0.007

Recurrent cash flow per share

(0.06)

(0.07)

(0.00)

0.02

0.05

Source: Company data, OSK-DMG

See important disclosures at the end of this report

4

Ausgroup (AUSG SP) 1 September 2014

SWOT Analysis  Wide-ranging skill-sets allow it to bid for a broad scope of work

 Weaker mining sector outlook given slower growth in China and lower iron ore prices  Delays in the award of LNGrelated contracts

 The oil & gas sector in Australia is going strong, with high committed capex levels  Large volume of liquefied natural gas (LNG)related contracts yet to be awarded  Lacks pricing power

 Low visibility of contract awards and work progress

P/E (x) vs EPS growth

P/BV (x) vs ROAE

6%

267%

1

3%

133%

1

60

0%

1%

40

-133%

0

-2%

20

-267%

0

-5%

0

-400%

0

-8%

P/B (x) (lhs)

Jan-17

1

Jan-16

80

Source: Company data, OSK-DMG

9%

Jan-15

100

EPS growth (rhs)

12%

1

Jan-14

400%

P/E (x) (lhs)

1

Jan-13

120

Jan-17

533%

Jan-16

140

Jan-15

667%

Jan-14

800%

160

Jan-13

180

Return on average equity (rhs)

Source: Company data, OSK-DMG

Company Profile AusGroup is an energy and resources specialist which provides fabrication, precision machining, construction and integrated services to natural resource development companies in Australia.

See important disclosures at the end of this report

5

Ausgroup (AUSG SP) 1 September 2014

Recommendation Chart Price Close 0.35

0.36

0.25

0.30 0.26

0.21 0.24 0.18

0.33

0.66 0.35

0.61

0.33

0.76

0.71

0.73

Recommendations & Target Price

na

0.81

0.51 0.41 0.31

0.21 Buy 0.11 Sep-09

Neutral

Dec-10

Sell

Trading Buy

Mar-12

Take Profit

Not Rated

Jun-13

Source: OSK-DMG, Bloomberg Date

Recommendation

2014-07-23

Sell

Target Price Price 0.35

0.45

2014-05-08

Sell

0.36

0.44

2014-02-14

Neutral

0.25

0.25

2013-12-18

Neutral

0.18

0.18

2013-12-11

Sell

0.21

0.23

2013-11-14

Sell

0.24

0.29

2013-10-14

Sell

0.26

0.28

2013-08-29

Sell

0.30

0.33

2013-07-12

Sell

0.33

0.38

2013-07-05

Sell

0.33

0.38

Source : OSK-DMG, Bloomberg

See important disclosures at the end of this report

6

RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share may10% exceed over 12 themonths next 3 months, however longer-term outlook remains uncertain Buy: Share price mayprice exceed over15% the next Neutral: Buy: ShareShare price price may fall within the 15% rangeover of +/the next 12 months Trading may exceed the10% nextover 3 months, however longer-term outlook remains uncertain Take Profit: Target been attained. accumulate lower Neutral: Share priceprice may has fall within the rangeLook of +/-to10% over theatnext 12 levels months Sell: may fall has by more 10% over next 12 months Take Share Profit:price Target price beenthan attained. 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