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KGI sees AusGroup 'turning around', though group isn't 'fully out of the woods yet'

Felicia Tan
Felicia Tan4/13/2021 04:50 PM GMT+08  • 3 min read
KGI sees AusGroup 'turning around', though group isn't 'fully out of the woods yet'
Amid other factors, KGI analyst Joel Ng expects the group’s prospects to see better days due to growth in the Australian economy.
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Prospects in AusGroup, an Australian-based integrated solutions provider, may finally be “turning around”, even if it isn’t “fully out of the woods yet”, says KGI Research analyst Joel Ng in an unrated report on April 13.

The group saw a “challenging” FY2020 ended June as it posted a full-year loss of A$59.5 million ($60.8 million). The loss came amid reduced work on their facilities, as well as impairments of PPE and intangible assets.

However, Ng expects the group’s prospects to see better days due to faster-than-expected growth in the Australian economy.

Figures from Bloomberg consensus have estimated Australia’s economy to grow by 4.4% in 2021 and 3.2% in 2022.

SEE: AusGroup awarded long-term master contract; increases order book to over A$1 bil

“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,” notes Ng.

In addition, the completion of new LNG construction projects and continued “significant investments” in the resources sector are positive for AusGroup’s prospects in the next 12 to 24 months, says Ng.

The group also scored a 10-year maintenance contract with Chevron Australia on March 22, which is estimated to provide revenue of A$100 million per annum.

Maintenance contracts form about a third of the group’s normalized revenue, and provides a stable base compared to project-based works.

Ng adds that other project-related works should start to resume in 2HFY2021 as clients have largely delayed their projects since 2020, according to AusGroup’s management.

On this, Ng expects earnings to recover going forward, with “upside potential” as the group secures more projects and maintenance contracts.

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That said, despite the optimism on the group’s prospects, Ng is slightly cautious as he notes 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 Dec 31, 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 A$38.7 million related to the Port & Marine business,” writes Ng.

The business recognised some A$50 million of impairments in FY2020 due to a lack of activity during 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,” he adds.

As at 4.49pm, shares in AusGroup are trading 0.1 cent higher or 3.4% up at 3 cents.

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