After taking a nibble at Austin Engineering (ANG) today, I thought I should search for other views on the business. Last week Tony Yoo from The Motley Fool shared a note by Shaw and Partners portfolio manager James Gerrish. James thinks “Austin Engineering has been oversold given the share price decline was harsh relative to the downgrade”. More below:
Punished too harshly, and ready to bounce back
The Austin Engineering Ltd (ASX: ANG) share price has crashed 27% since 2 May after a profit guidance downgrade.
According to Gerrish, there was a single source for the change in numbers.
“The downgrade stemmed from their Perth business unit which was expecting to deliver on a contract before year-end before the order was delayed,” he said.
“As a result, much of the fixed costs associated with the contract will be booked this year, while the revenue won’t land until 1Q24.”
Even with that nose dive, the stock is 18.75% higher than it was a year ago, which is an enviable performance considering the rest of the market.
The reality is that the rest of Austin Engineering is sound.
“The other business units are progressing well with revenue growth coming through and margins improving as a result.”
Thus Gerrish’s team is “bullish” on Austin Engineering shares.
“We see Austin Engineering as oversold, given the share price decline was harsh relative to the downgrade.”
Disc: Held IRL 0.5%
Austin Engineering, the dump truck tray manufacturer has been DUMPED following the earnings downgrade on the 4th May 2023 (ASX Announcement). Normalised Net profit after tax for FY23 is now expected to be in the range $17-$19 million for the Austin group, including Mainetec. This figure is down from the previously reported guidance of $24 million, primarily due to a delayed order from a major customer. This is also down on FY22 NPAT of $20.6 million. The share price reached a high of 40 cps in April and is now trading at 28 cps, down 30%. I think this is a buying opportunity, here’s why!
Since the guidance downgrade the order book has grown to record levels. Austin’s group order book to the end of May 2023 was up 21 percent year-on-year to $146 million and more than double from the same time two years ago (ASX Announcement). Put into context that’s around 57% of Forecast FY23 revenue.
A Quality Cyclical
Over the last seven years the ROE for the business has been consistently improving to 19.2% in FY22. FY23 ROE is expected to be weaker due to delayed orders (ROE 16% based on mid-point normalised NPAT of $18 million and shareholder equity of $111 million).
While there are eight analysts covering ANG on Simply Wall Street, only one analyst has provided forecast data. This analyst expects earnings to grow at 37% and ROE to be c. 21% over the next 3 years. Given the rapidly growing order book, I think this is feasible, especially on the back of delayed orders in FY23.
Conservative Debt
Net debt for the full year FY23 is expected to be circa $16 million (up from $12 million) primarily impacted by material procurement, partially offset by deposits following this delayed order, a situation which is expected to improve over the next few months as deliveries are made. Net debt on equity is still conservative at c. 14%.
Margins OK (FY22)
Gross Margins 45%
Net Profit Margin 6.2%
Valuation Ratios suggest it’s cheap
PE ratios:
Annual average PE ratios: 23.1 (FY19), 12.7 (FY20), 8.3 (FY21), 6.7 (FY22).
PE based on FY23 normalised earnings = 9.3 (28 cps / 3 cps)
PE based on forecast FY24 earnings = 5.6 (28 cps / 5 cps)
PEG = 0.3
PB = 1.5
Expected Annual Return 17%
Using McNiven’s StockVal Formula and assuming Normalised ROE of 20%, Equity of 19 cps, earnings reinvestment of 70%; You could pay up to 35 cps for a minimum annual return of 15%. At today’s share price (28 cps) you could expect an annual return of 17% (including growth, dividends and franking credits), or higher if PE adjusts upwards.
About Austin Engineering
Austin is a global engineering company. For over 50 years, Austin has partnered with mining companies, contractors and original equipment manufacturers to create innovative engineering solutions that deliver productivity improvements to their operations.
Austin is a market leader in the design and manufacture of loading and hauling solutions, including off- highway dump truck bodies, buckets, water tanks and related attachments, supporting both open-cut and underground operations. Complementing its proprietary product range are repair and maintenance services performed in our workshops and on clients’ mine sites, and spare parts.
Through Austin’s own design and engineering IP and range of tailored products, it delivers solutions for all commodity applications and drives increased efficiencies in productivity and safety in both open cut and underground mining operations.
Austin’s products can create more sustainable mining operations by delivering the lowest cost per tonne to end user, reducing fuel usage per material carried.
The Company is headquartered in Perth and has operations around the world in Australia, USA, Chile and Indonesia serving many of the major mining sites in the world both directly and through local partners.
Disc: Recently added IRL 0.5% (Cost price 28 cps)