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AusGroup Presents Bottom-Fishing Opportunity For The Bold
Trend Spotting | 30 December 2013
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By: Nicholas Tan
Articles (71) Profile

Beleaguered specialist engineering service provider to Australia’s commodity industry, AusGroup, continues to be under pressure as it reported negative 1Q14 gross and net profit margins, resulting from the downturn in mining activity and cost overrun issues.

According to OSK-DMG, the negative margins position means that AusGroup is burning cash daily, which is causing further pressure on its embattled balance sheet. We suspect the negative margins might have caused it to breach lending covenants, thus triggering the repayment of senior debt and the need to provide full cash back of all bank guarantees on issue expiring in mid-January 2014. Thus, dwindling its net cash position as at 30 September 2013 to A$7.9 million.

Though AusGroup still has cash-on-hand from the A$10.2 million profit on sale of its Singapore property, as well as related fixed assets and scaffolding, its cash-burn rate remains high, which is a cause for concern and heightens insolvency risk at the firm.

AusGroup has been in discussions with bankers and is exploring options to get cash for working capital purposes, including contract bonding facilities in early 2014 or a share placement, but this will dilute the existing shares held by shareholders.

In a recent press release, AusGroup reported an increase for work-on-hand to A$219 million from its previous 1Q14 update of A$179 million. This is derived from a shift in bid focus by the firm to the more upbeat oil and gas sector, from the increasingly competitive and slowing mining sector.

Nonetheless, based on recent experience, OSK-DMG feels that the bulk of its contracts-on-hand will still fetch negative margins, and are unlikely to cover overheads. However, we are positive on this strategic directional change, though it needs to win more orders as its total order book still remains historically low, and stands at less than half of its FY13 total turnover.

Moving forward, key upside catalysts for the stock include more contract wins from the oil and gas industry, which we believe commands a higher margin, as well as the refinancing of its current debts which would solve insolvency issues thus reducing the possibility of incurring an impairment charge on its A$27.1 million in goodwill and intangible assets for the coming reporting period.

From the chart above, we see that AusGroup has suffered a sharp sell-down since the start of the year. The counter has tumbled 72.8 percent from its year-high of $0.665 on 14 January 2013, in a downtrend channel which still remains intact.

The firm’s stock price recently gapped down for the second time on 12 December 2013 (as shown by the purple highlight), causing a divergence in the short- and intermediate-term moving averages while remaining below both the 20- and 50-days moving averages, which indicates a bearish signal.

Though the bearish sentiment for the counter is strong, it has already been sold down substantially and appears to be stabilising between the price range of $0.177 and $0.183. The MACD is trending upwards and looks set to start a positive signal crossover, which might be a possible entry point to long the stock. In addition, the 14-days RSI, remains in “over-sold” territory, suggesting that the recent sell-down might be overdone.

Investors with high risk appetite may bottom-fish with a short-term target price of $0.20 (which is the closing price of the second gap down) and a cut-loss at $0.162 (which is the low of 16 December 2013), representing a risk-to-reward ratio of 1:1.5, but we warn that it is a risky business and more risk-averse investors should stay clear considering the negativity surrounding the stock.

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

Please click here for more information about this author.

AusGroup  0.023 -- --   
Business: Co mainly provides subcontract services to the oilfield equipment manufacturing co in South East Asia. [FY16 Turnover] Projects (62.2%), maintenance Services (28.5%), fabrication & manufacturing (5.5%), port & marine Services (3.8%).

Insight: Nov-17, 1Q18 revenue increased by 53.6% due to the... Read More

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