Company Overview: Austin Engineering Limited (ASX: ANG) is engaged in the manufacturing, repairing and supply of mining attachment products. It also provides other related products and services to the industrial and resources sectors. The company has operations in the geographies of Asia-Pacific, North America and South America.

ANG Details

Resilient Performance with A Decent Order Book: Austin Engineering Limited (ASX: ANG) manufactures, repairs and is engaged in the maintenance of products used in the mining and resources sector. The market capitalisation of the company as on 25 June 2021, stood at ~$78.31 million. The company has recorded a strong performance in the Asia-Pacific region in H1FY21, despite the impact of the COVID-19 pandemic on the global economy. It has reported that the order book comprises of ~90% of the level required to meet the underlying NPAT guidance in excess of $9 million in FY21.

During H1FY21, the company reported normalised EBITDA of $6.3 million from continuing operations, reflecting an increase of ~32% from the previous corresponding period. The underlying NPAT from continuing operation stood at $1.5 million during the period. The cash outflow from operations stood at $6.8 million due to working capital requirements during the period. The management declared a fully franked interim dividend of 0.2 cents per share, paid on 5 April 2021. It ended the period with a cash position of ~$13.03 million as of 31 December 2020.

Rise in Cash Levels (Source: Analysis by Kalkine Group)

Increased Working Capital Requirements: In H1FY21, the company reported increased net working capital requirements amounting to $15.1 million, compared to $5.4 million as of 30 June 2020. This was on the back of a reduction in trade payables. It made capital purchases during the period that included ~$0.7 million in development costs with regards to the implementation of a global ERP system. The net debt increased to $15.4 million in order to support working capital requirements on the back of increased activity in the Asia-Pacific region.

H1FY21 Cash Flow Statement (Source: Company Reports)

Optimisation in Business: ANG is in the process of closure of its operations in Colombia, with an expected date of cessation in Q3FY21. It holds asset for sale of $8.2 million in South America, which includes $7.9 million in property assets.

Update on CEO Transition: On 25 June 2021, the management has provided an update on the previous announcement of CEO transition on 17 May 2021. As per the company, the resignation of Mr Peter Forsyth from the role of CEO and Managing Director is effective from 25 June 2021, instead of 31 July 2021. David Singleton, who is a current Non-Executive Director will act as the interim CEO for the time being. The strategic review undertaken by David Singleton for the identification of organic and inorganic growth opportunities remains underway.

Top 10 Shareholders: The top 10 shareholders together form around 71.69% 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 14.95%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improvement in the gross margin in H1FY21 to 18.4%, compared to 14.8% in the previous corresponding period. There was also an improvement in the net margin to 1.7%, from a level of 0.2% in H1FY20. The liquidity improved during the period with current ratio at 1.38x in H1FY21, compared to 1.21x in H1FY20. However, there was an uptick in debt to equity ratio of the company to 0.30x in H1FY21, from a level of 0.14x in the prior corresponding period.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company’s line of business makes its dependent on decent commodity prices, which are supportive of spending by miners for capital equipment. Any adverse impact on the commodity prices due to macro-economic issues like the ongoing COVID-19 pandemic might also have an impact on ANG's products and services. It is also exposed to other macro factors like geopolitical tensions and political instability in the target countries. It is also exposed to currency risk due to operations in different geographies.

Outlook: The company has reiterated that it expects an underlying NPAT in excess of $9 million from continuing operations in FY21. It anticipates the earnings to be driven by decent order books in the Asia Pacific region and a growing order book in North America. It also expects a decent H2FY21 from the South American business unit, based on near-term opportunities.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: 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: Any disruption in the new equipment deliveries from OEM's provide the company with an opportunity to deliver productivity improvement products to clients who seek payload improvements on the existing fleet. As per ASX, the stock of ANG is trading below its average 52-weeks’ levels of $0.115-$0.190. The stock of ANG gave a positive return of ~8% in the past one year and a positive return of ~3.84% in the past one month. We have valued the stock using an EV/Sales 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 median EV/Sales (NTM trading multiple), considering the increase in net debt of the company and uncertainty in business conditions due to COVID-19 volatility. For this purpose, we have taken peers such as MaxiTRANS Industries Ltd (ASX: MXI), Korvest Ltd (ASX: KOV), to name a few. Considering the expected upside in valuation and current trading levels, decent EBITDA performance in H1FY21, expected recovery in economy and demand for its products and an optimistic guidance outlook, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.135 as on June 25, 2021.

ANG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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