Ausenco
Always darkest just before dawn
Event
* AGM update that tender costs and project delays are impacting earnings.
Impact
* 1H10 still tough. Ausenco commented that 1H is being impacted by projects starting later than anticipated and the costs of holding staff in anticipation of contract awards. High tender levels are reducing billable hours and increasing costs. Staff numbers remain around 2,400?2,500, similar to December 2009 levels and above the GFC lows of 2,200.
* Ausenco is also reviewing the carrying values of some of its US business given activity levels.
* FY10 looking better. Ausenco is working on early stage engineering studies and EPCM tenders with a total capital value of US$24.4bn which will be targeted for conversion into EPCM projects in CY10 and beyond. We are becoming more confident in this pipeline given the sustained recovery in many commodity prices.
* We expect the proposed Australian resource tax to have a limited impact on Ausenco given 75?85% of earnings are generated outside Australia.
* Ausenco expects earnings growth from 2H FY10 and into FY11 based on this pipeline. No formal guidance was given.
* Strong balance sheet. Ausenco raised A$90.5m from a placement at A$3.20 per share in May 2009. Ausenco has a strategy to grow the business into projects over US$500m which will require increased bonding capacity. AAX ended FY09 with net debt of A$0.5m.
Earnings and target price revision
* FY10E EPS down 22.4% to 27.0cps. FY11E EPS down 5.3% to 36.9cps.
* Price target increased from A$4.16 to A$4.47 due to our valuation being rolled from FY10 to FY11.
Price catalyst
* 12-month price target: A$4.47 based on an EV/EBITA methodology.
* Catalyst: EPCM contract awards.
Action and recommendation
* Neutral retained. Ausenco is a conservatively financed company and is positively exposed to a recovery in resource engineering-related activity.
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