Company Overview: Austin Engineering Limited (ASX: ANG) is engaged in the business of repairing, manufacturing and supply of mining attachment products. It has a presence across the Asia-Pacific, North America and South America region. During FY20, the Group reported most of its revenue from the Asia-Pacific region (~51%), followed by North America (~29%) and South America (20%). The company’s core competitive advantage lies in its engineering expertise and intellectual property.
ANG Details
Order Wins and Decent Pipeline Expected to Drive Growth: 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 26 March 2021, stood at ~$92.77 million. As per an update on 14 December 2020, the company has announced that it has received orders of over 100 products amounting to more than $35 million in revenue. The order comprises of truck bodies, water tanks and buckets.
ANG is positive in the Asia-Pacific region with performance outperforming expectations. It anticipates the workshops in Perth and Indonesia to be well-positioned and remain close to capacity in FY21.
During H1FY21, despite the impact of COVID-19 pandemic on the business environment, the company reported resilient performance with a slight decline in total revenues from the previous corresponding period. The revenue stood at $87.9 million with growth in the Asia-Pacific region by ~24% to $60.5 million, aided by decent performances in Perth and Indonesia. The demand in North America was impacted due to the COVID constraints and a change in the political landscape in the country. The revenue from South America grew by ~37% to $15.5 million, on pcp basis. There was an increase of ~32% in the EBITDA to $6.3 million, reflecting an improvement in efficiencies during the period. The interest costs also reduced in H1FY21 owing to lower average levels of debt. The management has declared an interim dividend of 0.2 cents per share during the period.
H1FY21 Financial Performance (Source: Company Reports)
Decent Performance in Asia-pacific Region: The company delivered decent revenue growth in the region to $60.5 million in H1FY21, compared to $49 million in the previous corresponding period. It has witnessed decent earnings performance in Perth, aided by orders in hand at the beginning of the year. The facility has received further orders, which will drive utilisation in FY21. There was also high workshop utilisation in Indonesia during the period, with product delivery into the East Coast of Australia, within Indonesia and into Africa.
H1FY21 Asia-Pacific Performance (Source: Company Reports)
Decrease in Trade payables: The company experienced an increase in the working capital during H1FY21 amounting to $15.1 million, owing to a decent decrease in the trade payables. The cash flow was also impacted by an $8.9 million increase in Asia-Pacific due to an increase in receivables and work in progress on works that were completed in December 2020 and January 2021 respectively. There was also a $3.6 million increase in working capital needs in South America, on the back of a decrease in trade payables during the period. The contract liabilities decreased by $3 million to $11.7 million. The net cash outflow from operations in H1FY21 stood at $6.8 million.
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: The company delivered decent margin performance in H1FY21 with an improvement in the gross and net margin when compared to the previous corresponding period. It reported gross margins at 18.4% and net margin at 1.7%. ROE stood at 1.6% during the period. It reported a current ratio of 1.38x in H1FY21. There was an improvement in the cash cycle to 159.5 days, down from a level of 177.3 days in H1FY20. Net debt increased during the period to $15.4 million in view of increased working capital requirements and increased activity in the Asia-Pacific region. The total debt stood at $28.3 million, including long term capital lease obligations of $8.8 million as of 31 December 2020.
Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The onset of the COVID-19 pandemic has brought about a change in the competitor landscape, customer priorities and workforce mobility and management. The company needs to have a proper risk management framework in place in order to mitigate the risks of the changing macro-environment. It operates globally with businesses in different legal territory and compliance cultures. It faces the risk of failure to comply with the laws of the land, which might impact its ability to continue operations in that region. ANG is also dependent on its strategic clients from the resource sector for profitability and the clients’ products are exposed to volatile and cyclical commodity prices. This in turn can upset the demand for the company’s products and services.
Outlook: The company expects a material improvement in business performance from the America region in H2FY21, with orders in the pipeline. The business landscape in Asia-Pacific remains optimistic, with business in Perth and Indonesia expected to deliver decent H2FY21 results, aided by a strong pipeline and order book. The company expects the growth to continue into FY22. It has established sales partnerships with local operators in Africa and Europe, which is expected to drive business activities from Indonesia. It has also received orders in North America in January and February 2021, for delivery of products prior to 30 June 2021. The increase in commodity and oil prices augurs well for the company, as this indicates there might be an increase in mining activity and equipment needs.
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 is in the process of optimisation of its business and had assets held for sale amounting to $8.2 million in South America during H1FY21 end. As per ASX, the stock of ANG is trading above its average 52-weeks’ levels of $0.110-$0.190. The stock of ANG gave a positive return of ~6.66% in the past six months and a positive return of ~3.22% in the past one week. On a technical analysis front, the stock of ANG has a support level of ~$0.15 and a resistance level of ~$0.175. 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 premium to its peer median P/E (NTM trading multiple), considering the decent pipeline of orders and optimistic FY21 guidance. For the purpose, we have taken peers such as PTB Group Limited (ASX: PTB), Acrow Formwork and Construction Services Limited (ASX: ACF), LaserBond Limited (ASX: LBL), to name a few. Considering the expected upside in valuation, resilient performance in H1FY21, strong order book and pipeline , the recent contract wins and the key risks associated with the business considering the increase in net debt, we recommend a ‘Speculative Buy’ rating on the stock at the current market price $0.160, as on March 26, 2021.
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ANG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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