KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

AusGroup Limited (AUSG SP)

Finally turning around although not fully out of the woods yet

Updated 13 April 2021

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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.

  • 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.

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 commercialize 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. 

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