Results below expectations; but maintain Outperform. 1Q10 net profit of A$1.7m (-70% yoy) was 50% below our expectation and 60% below consensus due to weaker-than-expected order-book recognition. We lower our earnings estimates by 10-37% for FY10-12 to incorporate lower order-win assumptions.
Accordingly, our target price drops from S$1.08 to S$0.96, still based on 13x CY11 P/E, its average since listing. Nevertheless, we retain our Outperform rating as we expect margin expansion and an acceleration in order wins from LNG and mineral projects in Australia by mid-2010.
• Revenue below expectations. 1Q10 revenue of A$74m (-43% yoy) was below our expected A$82m due to a slower-ramp up of projects and order-book recognition mainly from the mineral resource sector.
• Improved gross margins. 1Q10 gross margins of 14% improved 9% pts yoy thanks to productivity gains. We see the potential for further margin expansion if more high-margin contracts from the oil & gas sector are executed.
• Order book of A$350m; A$60m secured YTD. The order wins were below our expected A$150m. Ausgroup had bid for A$600m worth of projects in 1Q10 and plans to submit another A$700m-1.1bn by end-FY10 for projects in the oil & gas and mineral resource sectors. We have lowered our order-win assumptions for FY10 to A$400m (from A$540m) and A$500m for FY11 (from A$540m). We expect a pickup from 2H10 from a recovery in Australia’s mineral resource sector as projects are revived.
• Positive sector outlook. We continue to see Ausgroup as a key beneficiary of a surge in capex in the Australian LNG sector. Ausgroup recently secured a A$30m contract from the Pluto LNG project and is bidding for A$1bn of fabrication work for the Gorgon project. We see positive newsflow in the LNG sector providing stock catalysts.
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