fair value

This was what I posted on the 08/08/09:

However, I do believe there is a general overhang after the placement and SPP. Additionally, the market is also waiting for the upcoming result and guidance on the outlook. The upcoming result may disappoint and the market is preparing for that.

Additionally, if AAX wants to race off, they will need to do 1 of 3 things (or hopefully all of them):

1) The obvious: post a better than expected result (like Bradken).

2) Convert some of their project pipelines in serious contract wins.

3) Paint an improving picture of the market outlook for the next 18 months.

Short term overhang of stock is expected. We also need to see some projects being converted into wins. Good div. in the upcoming result will help.

Nothing too sinister in this stock. Good management and project pipeline with little or no net debt. Will trade sideways for a while until one of the above mentioned catalysts takes place.


19/08/09

These are my thoughts following the result:

1)Results were worse than expected. This is not the best result of the season and probably one of the worse ones. Management has still re-affirmed their FY'09 guidance(they have a December year end) Their guidance is $40 - $43mil NPAT for FY'09. Based on their market update, it may mean that they are still able to achieve $40mil NPAT for FY'09. However, you are bound to see analysts downgrading their FY'09 expectations to somewhere between $30mil NPAT to $35mil NPAT. So, forget the Bradken like response to the result.

2) They still need to convert 1-2 major projects in their pipeline into actual contract wins over the next 2 months in order to reach their target of $40 - $43mil NPAT. If not, then the $30-$35mil NPAT range (which analysts will downgrade to) will be correct.

3) They did paint an improving picture of the outlook for the future years. However, dividends are under expectations, so, even with the improving conditions, it alone is not enough to lift the share price.

4) Balance sheet is one of the strongest in town, which should be a plus. 1 or 2 major contract wins will be a huge positive (especially the phosphate contract). If they win the phosphate contract, then there will be significant upside.

5) Well, Gorgon is the talk of town. If it goes ahead, there will be a huge tide (actually tsunami) that lifts all boats within the engineering sector. This will be directly/ indirectly beneficial to firms like AAX due to margin expansions and lots of flow on work. AAX is a medium sized firm that is able to work directly on certain components of the Gorgon contract as they have enough internal expertise to do that.

6) In terms of valuations, AAX is probably the cheapest with the best balance sheet out of the large/mid cap. space. There are just too many engineers to list in detail, but if you speak to your broker, he/she can tell you the valuation metrics for the likes of LEI, WOR, UGL, MAH etc. Compare it to AAX. AAX in my opinion will still remain cheap/ trade sideways for a while as there is the potential for an FY'09 downgrade sometime in late October. However, if you believe the Gorgon deal going ahead, then this is a nearly debt free, mid sized & decently valued engineering firm you can get on board and hold onto.

7) Huge volumes seen today are a result of certain instos. getting out of their $3.20 placement stock in AAX, whilst other instos. were buying up for the "Gorgon story". I believe it is a Hold at these levels and if it does drop under $4, you can start nibbling away.

Happy to answer any queries.

Happy investing.