09-Dec-2018: Austin Engineering is involved in the manufacture, repair, overhaul and supply of mining attachment products, general steelwork structures and other associated products and services for the industrial and resources-related business sectors.
I have seen various brokers and analysts promoting this company as a buy based on the uptick in the mining cycle. When the mining boom ended a few years ago (commodity prices dropped & stayed low for some time), ANG found themselves with far too many branches (around the globe) & too many overheads, having expanded too rapidly during the boom. They became loss-making and had substantial debt at a time when demand for their services was shrinking.
A few analysts were basing their "buy" calls on the bucket replacement cycle. ANG repair and refurbish buckets and blades (and cutting edges) for mining & earthmoving equipment like loaders, scrapers, dozers and excavators. They also sell new buckets and blades and other parts for these machines, see here. Those higher-margin sales are tied to how often mining and earthmoving companies choose to replace those items.
During a mining boom, companies are cashed-up and will generally replace them every 4 or 5 years. When times are tougher, they will just keep patching up their existing buckets and blades and extending the replacement cycle. The "buy" argument was based around the replacement cycle already having being pushed out to 7 years in many cases (in 2017) and that you can't just keeping patching up that sort of equipment forever; eventually it needs to be replaced. These parts wear down and eventually wear out. Some of the parts have bolt-on cutting edges - which can be regularly replaced, but that process justs extends the life of the main part (a loader bucket or a dozer blade for instance), which will still wear, and will still need to be replaced at some point.
Analysts don't always get it right - have a look at this. That's Bell Potter reducing their ANG price target from $5.65 to $4.65 in mid-2013, but maintaining their "Buy" call. ANG are now $0.22.
The turnaround is now on, but it has taken longer than most analysts expected. ANG still have debt, but they are reducing it; they have low ROE, but that is expected to increase, along with their EPS. Their forward PE looks a lot better than their current PE, and they might even re-establish dividends in 2020 or 2021.
There is plenty more info on them here: http://www.austineng.com/
Addition: 11-Jun-19: Six months later, and ANG are down another 16% - from 22c to 18.5c as I type this. Their CFO quit in December, they had disappointing 1st half results when they reported in February, they have been selling assets, including land and cranes (to help reduce their debt), and then they downgraded full year guidance in April:
FY19 Guidance
Following review of its unaudited management accounts for the financial year to date, current production schedules and the pipeline of qualified opportunities for completion during the current financial year, Austin expects its Normalised EBITDA from continuing operations for FY2019 will be between $21 million and $23 million (previously $25 million - $28 million).
The key contributing factors to the revised guidance include:
- deferral by clients of a number of projects, previously expected to be fulfilled in the current financial year, to FY2020 for operational and budgetary reasons;
- delays in the award of certain other projects with the result that they are now at risk of not being delivered in FY2019; and
- additional initial training and costs incurred in the deployment of key capital expenditure items, including the robotic welding machine in Perth and new welding technology deployed in the USA facility, impacting Q3 results. This equipment is now operating in line with expectations, delivering the anticipated productivity gains to those businesses.
Austin views the delays that are currently being experienced with new projects as temporary rather than indicative of any longer-term reduction in workload and expected earnings.
Notwithstanding the reduction in Normalised EBITDA guidance, Austin expects its FY2019 Normalised Net Profit After Tax will increase by up to 46% on FY2018 of $5.4 million, to between $6.5 million and $7.9 million.
They then corrected that the following day...
Austin wishes to correct this statement with an expectation of FY2019 Normalised NPAT of between $7.9 million and $9.3 million, an increase of up to 52% on FY2018 of $6.1 million.
The initial disclosure included certain depreciation and interest charges that relate to discontinued operations and as such understated the expected FY2019 Normalised NPAT range. In addition, the FY2018 Normalised NPAT referred to in the release ($5.4 million) included both discontinued and continuing operations. FY2018 Normalised NPAT from continuing operations was $6.1 million.
They couldn't even get their downgrade right. Bit of a mess IMHO. Don't hold.
