Austin Engineering Limited

Company Overview: Austin Engineering Limited (ASX: ANG) is engaged in the manufacture, repair and supply of mining attachment products and services to the industrial and resources sectors. The company has operations in the following geographies and markets – Asia Pacific (located in Australia and Indonesia); North America (located in the U.S.A.); and South America (has operations in Chile, Peru and Colombia).

ANG Details  

Decent Committed Order Book Expected to Provide Earnings Growth Ahead: Austin Engineering Limited (ASX: ANG) manufactures, repairs and maintains products used in the mining and resources sector. The market capitalisation of the company as on 21 May 2021, stood at ~$75.40 million. The company is in the process of optimising the business and create value for the shareholders. Its operations in Colombia are in the process of closure, with operations expected to be ceased in Q3FY21. It is holding assets for sale at $8.2 million from the operations in South America and includes $7.9 million in property assets.

ANG's business has been impacted particularly in North America due to the onset of the COVID-19 pandemic and political uncertainties in the region during H1FY21. However, it expects an improvement in the H2FY21 results with orders already in place, which is exceeding revenue generated in H1FY21.

During H1FY21, the Group posted resilient financial results with Normalised EBITDA at $6.3 million from continuing operations, reflecting an increase of ~32% on the pcp. Underlying NPAT stood at $1.5 million during the period. There has been an operating cash outflow of $6.8 million in H1FY21, owing to working capital requirements, particularly in the Asia-Pacific region. The company expects a decent performance in H2FY21 on the back of working capital spends in H1. The management declared an interim dividend of 0.2 cents per share during the period, paid on 5 April 2021.

H1FY21 Financial Performance (Source: Company Reports)

Increased Working Capital Requirements Due to Decrease in Payables: In H1FY21, working capital increased to $15.1 million on the back of a significant reduction in trade payables by the company. There was an increase of $8.9 million in working capital from the Asia-Pacific region due to an increase in receivables on works completed in December 2020. The contract liabilities also decreased by $3 million to $11.7 million in H1FY21, with order inflow during the period for delivery in H2FY21 and FY22.

Working Capital Trend (Source: Company Reports)

Decent Performance in the Asia-Pacific Region: The company delivered a decent performance in the region with a revenue of $60.5 million in H1FY21, compared to $49 million in the previous corresponding period. EBITDA also grew to $9.5 million from a level of $4.6 million during the same period under consideration. There was a substantial improvement in the margin performance of the company with an EBITDA margin at 15.7% in H1FY21, compared to 9.4% in H1FY20. Operations in Perth have received decent order inflow during the period, which is expected to aid the high utilisation of the facility for the remainder of FY21. The performance in Indonesia was also decent, with high workshop utilisation throughout the period in H1FY21.

Headquarters Relocation to Provide Strategic Benefits: The company has recently announced that it will be relocating its headquarters from Brisbane to Perth. The decision augurs well for the Western Australian and Asian operations, which contributes a major chunk of the company’s profits. The relocation is also expected to deliver cost savings and better communications with the major customers of the company. ANG has also decided to conduct a strategic review of its operations and identify substantial organic and inorganic growth opportunities.

Top 10 Shareholders: The top 10 shareholders together form around 71.71% of the total shareholding, while the top 4 constitute the maximum holding. TIGA Trading Pty Ltd and Perennial Value Management Ltd.  are holding a maximum stake in the company at 24.24% and 14.96%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: During H1FY21, the company reported improved margin performance with gross margin of 18.4%, compared to 14.8% in H1FY20. The net margin also improved to 1.7%, from a level of 0.2% during the same period. ROE of the company stood at 1.6% in H1FY21. There has been an improvement in the liquidity of the company, with the current ratio at 1.38x in H1FY21 from 1.21x in H1FY20. The debt-to-equity ratio increased to 0.30x in H1FY21, compared to 0.14x in the previous corresponding period.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: Like many other companies in the sector, ANG also has been impacted by the COVID-19 pandemic. The North American operations in particular, has reflected a decline in revenue in H1FY21 due to the adverse impact of the pandemic. There has been a slowdown in demand due to reduced economic activities in that region. The company’s operations are also exposed to other macro-economic factors such as a change in the political landscape, geopolitical tensions, trade wars, etc., to name a few. The company witnessed an increase in borrowings primarily to support the working capital requirements. It ended H1FY21 with a cash position of $13 million as of 31 December 2020, and with a total debt of $28.3 million on the balance sheet.

Outlook: The company believes that it is on track to achieve an underlying NPAT in excess of $9 million in FY21, with 90% of projected revenue already locked in from order book, earned revenue and other work during the year. The pipeline is supported by decent order books in the Asia Pacific region and an improving order book in North America. The decent price levels of copper and iron ore are also driving demand for capital equipment among the miners. ANG will also look to leverage on opportunities to provide improved products to clients who seek payload improvements on existing fleets through the application of lightweight products.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company’s current CEO and MD Peter Forsyth has decided to retire effective 31 July 2021, and ANG has appointed non-executive director David Singleton to act as an interim CEO post 1 August 2021. As per ASX, the stock of ANG is trading below its average 52-weeks’ levels of $0.120-$0.190. The stock of ANG gave a negative return of ~7.40% in the past one year and a negative return of ~13.79% in the past one month. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average P/E (NTM trading multiple), considering the uncertain macro scenario due to the prevalence of the COVID-19 pandemic and high debt levels of the company. For the purpose, we have taken peers such as LaserBond Ltd (ASX: LBL), MaxiTRANS Industries Ltd (ASX: MXI), Korvest Ltd (ASX: KOV), to name a few. Considering the expected upside in valuation and current trading levels, decent performance in the Asia-Pacific region, strong order book with secured revenue, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.125, down by 3.847% as on May 21, 2021.

ANG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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