The UOB Kay hian reports gives numerous ways to value Ausgroup. The consensus figure is in the region of 72 cents. If that is the case, at 40 cents, there is so much margin of safety to buy now. Which begs the question why it has been languishing like this for such a long period of time. Not enough coverage? probably. But one should take such forecast as a pinch of salt.
Below are some of the things that is interesting about investing in Ausgroup:
“It has been argued before that AusGroup is trading at a discount to its peers
due to its low margin (FY06 net margin was 4.7%). However, AusGroup’s peers
in Australia have an average net margin of 4.3% while its peers in Singapore
have an average net margin of 5.6%. Given that Cactus’ contributions to the
Group are expected to improve margin substantially to 6.2% and higher beyond
FY07, we feel that this argument is not justified.”
I feel that if margins is forcasted to improve substantially, so will share price given SGX’s record for placing a premium to net margin improvement and discount if the margin of a company fails miserably.
- Dependent on the oil and gas and mining-related industries. AusGroup is dependent on the oil and gas and mining related industries as they derive a majority of their business from the oil and gas and mining related industries. These industries are driven by the global demand for minerals and energy and could suffer in the event of a slowdown in demand. Management has recognised this risk and has undertaken steps to limit AusGroup’s exposure to a mining industry downturn.
- Non-recurrent, project-based work. A majority of AusGroup’s business is project-based and non-recurring. The Group therefore has to continue to be aggressive when tendering for projects and has to ensure that it is able to maintain its visibility as a premium engineering services provider. One way AusGroup is looking to increase cash flow stability is to look at more long-term maintenance contracts.
- Highly dependent on labour. AusGroup’s business relies heavily on its skilled labour as it is a key component to its business. Labour disputes, or the inability by management to retain staff, particularly the skilled engineers, tradesmen and experienced project staff could have an adverse effect on the Group’s future earnings. However, thus far, management has been able to maintain and even grow its labour force over the last few years.
- Exposure to cost overruns. Unforeseen circumstances, such as errors in estimation during fabrication, could result in cost overruns. AusGroup has taken steps to reduce this particular risk as most contracts are negotiated on a cost-plus basis or have clauses to compensate for fluctuations in material and labour costs.
- Exposure to credit risk of customers. A substantial portion of AusGroup’s projects involves progressive billing according to the stages of project completion. AusGroup extends open account credit terms of between 30 to 60 days to their customers for projects and are subjected to the risk of bad debts should any of its customers face financial difficulty. However, as most of AusGroup’s customers are large MNCs, the probability of any of them defaulting payment is relatively low. Furthermore, AusGroup’s management is also selective about the contracts they tender.
- Disputes, claims, defects or delays. AusGroup could encounter disputes with customers due to defects or delays, which could result in protracted litigation. This would have a negative impact on the Group’s earnings and financial position.