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BT Brokers' Take - AusGroup
BT Brokers' Take - AusGroup

(2007-04-26)

  AusGroup
  April 25 close: $0.90
  MERRILL LYNCH, April 25

  INITIATE with a 'buy' and a 12-month price objective of $1.10: AusGroup provides engineering construction, maintenance and industrial services to the oil and gas and mining sectors in Australasia. We are the first foreign broker to cover the stock, which we believe is under-researched.

  Leveraged to boom in LNG, mining and deepwater: AusGroup should continue benefiting from the robust pipeline of projects in Australian oil and gas, LNG and mining, given its solid execution track record and manufacturing expertise. The acquisition of Cactus Engineering, a subsea production equipment manufacturer in Singapore, also gives a unique exposure to the booming subsea oil and gas market globally (especially deepwater), which is expected to grow by 41 per cent over 2006-11.

  Strong earnings growth and margin expansion: We forecast AusGroup to deliver a net profit CAGR of 42 per cent over 2007-09, with the core business in Australia still driving 70-80 per cent of earnings. We also expect net margins to expand from 4.7 per cent in FY06 to 9.1 per cent in FY09, due to margin accretion from the higher-margin subsea equipment business of Cactus.

  Attractive valuation; 49 per cent potential upside: On our estimates, AusGroup trades on 7.7 times 2008 earnings, a compelling 46 per cent discount to its peers in the Asia Pacific. We believe this valuation fails to reflect AusGroup's long-term growth opportunities and margin expansion potential. Our discounted cashflow-based price objective implies a PE of 14 times 2008E earnings.

  Risks: A downturn in the oil and gas and mining sectors, project execution risk, departure of key management, lack of skilled labour and M&A risk. BUY

《The Business Times》


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