Yes an interesting episode, chatting about four of my favourite stocks, ANG, EOL, ABV and RUL, with Claude and Chris Steptoe from DMX: ASX Small Cap Wrap 10: Austin Engineering (ASX: ANG) and Energy One (ASX: EOL)

Thanks @Solvetheriddle. I’ll definitely have a listen to this when I get a chance. We’re visiting my daughter’s family today. There’s been more weakness in the share price since ANG paused its on-market buyback 2 weeks ahead of the AGM. My understanding is this is not required by the regulator unless there is market sensitive news coming. However, this could be just a precaution, and the news could be either good or bad. I’ll definitely be tuning in to the call this Thursday 6 Nov at 12pm (AWST). Cheers!

@Solvetheriddle @RogueTrader Thanks for the heads up on the Austin Engineering (ANG) discussion between Claude Walker (A Rich Life) and Chris Steptoe (DMX Asset Management). Claude started by wearing the “Back Hat” (Devil’s Advocate) while Chris wore the “Yellow Hat” focusing on the benefits and possibilities. I enjoyed the discussion, however, I think Chris could have better supported his investment case with a few metrics to demonstrate this is more than just a “value pick”. Although it is that also valued at only 6 x FY25 earnings. Here are a few metrics that would have helped to show that ANG has an excellent return on shareholders equity:

1. EPS growth has been >25% per year over the last 5 years
2. ROE has increased from 4% to 20% over 7 years
3. The balance sheet is strong with Net Debt to Equity of 9%.
4. Although the Chile operation ran at a loss this year it only contributes 15% of the total revenue, and is the reason why the entire business has been severely discounted (unwarranted in my opinion)
5. ANG’s 5.7% fully franked dividend (8% yield) looks sustainable at a 35% earnings payout ratio.
6. ANG is reinvesting the remaining 65% of its earnings into an on-market share buyback, lighter tray design, improved efficiency and further growth.
7. The total addressable market (TAM) for replacement truck trays is 7x current production levels (500 trays) and the TAM is growing with the mining industry. There is an estimated 20,500 minings trucks in operation globally.

Claude pointed out that Advanced Braking Technologies, a business he owns and likes, works in a similar space with similar clients. Although Claude wasn’t impressed with the management stuff up in Chile. However, he thought Sy Van Dyk had a proven track record with DDH1 of turning a business around which he thought was repeatable. DDH1 was acquired by Perenti (PRN) after Sy got it humming.

I owned DDH1 at the time and followed what Sy did there. In my opinion DDH1 was a much better business than Perenti when they acquired it. It had higher ROE, much healthier balance sheet and paid better dividends! I thought they got it too cheap!

@Rick I know you have been banging the drum one this one and I can see why because it is so god damn cheap. What about the negatives though? These were discussed also in the pod and probably should be included for balance.

You mentioned the poor contract execution with management overcommitted on a contract with a major OEM in Chile which they attributed to a lack of commitment and hard work from the people in the Chilean operations. They also mentioned the company had to restate its FY24 earnings because they were originally overstated, which led to a messy presentation of their financial results. Also their reported profit used "adjusted NPAT," and Chris noted that many of the non-recurring adjustments were "not really oneoff," suggesting potentially misleading reporting. They pointed to the US mining expo which happens every 4 years and is clearly a cost of business. As you can see below there is a heap of adjustments. This problem for me is probably Austin's greatest sin as it raises the question of integrity of management.

The high capital intensive nature of the business was discussed, which makes it harder to achieve high profitability compared to companies with lower capital needs, such as software businesses. Additionally, the company faces "quite a few competitors" and some "strong competitors" in its market. Which leads me on to a question for you @Rick. Do you have a handle on the competitive landscape for this business? I would be interested to learn about this myself.

@Shapeshifter Yes, there are plenty of negatives/risks for ANG that were discussed in the pod, as you have mentioned. We have also discussed most of these here on Strawman.

My intention here was to point out some of the metrics that weren’t discussed in the pod which I thought Chris might have raised in his investment case. Claude did a great job of raising most of the weaknesses.

Chile is no doubt a debacle and a black mark against management. It will be critical for management to turn the Chile business around quickly to regain any credibility in the market.

In regards to ANG’s underlying figures, I have been ignoring these when it comes to assessing business performance. The metrics I’ve quoted above are all based on statutory results, not underlying. I don’t think it’s a been a great look for management to adjust FY24 and FY25 reported statutory figures especially when it’s in favour of FY25. Nor is it a good look to present underlying figures 54% higher than the statutory figures, and then to quote their ROE in their reports on the underlying figures (28% rather than 19% based on statutory NPAT).

While the business is capital intensive, the return on capital over the last 5 years has been high for a capital intensive business ( FY21 12%, FY22 18%, FY23 10%, FY24 23%, and FY25 17%, based on statutory results).

I need to do more work on ANG’s competitor's @Shapeshifter. My assumption has been that the high ROE (19% - 20%) indicates they have a competitive edge. This could be a dangerous assumption so I will investigate ANG’s competitors more thoroughly and put this together in a separate straw. It’s something I need to get my head around with more confidence.

Thanks for raising these issues. It’s always good to get a more balanced perspective! Helps you to become a better investor! :)