Stock of the Week Ausenco (AAX)

Ausenco (AAX) provides consulting, engineering, project management and operations solutions to the global resources and energy sectors.

AAX primarily delivers solutions to the minerals, infrastructure, energy, oil and gas and consulting and environmental sectors across the full project life cycle.

The company has recently integrated its PSI, Sandwell and Vector divisions under the Ausenco masterbrand.

As AAX’s business is dependent on its customers affording its services, the company suffered in 2008 as the global economic downturn hit AAX’s primary industries and companies slashed unnecessary spending.

However, with signs of a global economic recovery in place, AAX is benefitting from an increased workload. The group’s global project and tender pipeline now stands at US$27 billion.

Despite environmental difficulty being evident in AAX’s 1H10 results, the company forecasts a strong FY11 and FY12 on signs of a recovery in business confidence, meaning it will be one of the stocks to watch in coming months..

Overcoming obstacles

The effects of global economic volatility are still being felt since the onset of the GFC. However, AAX has managed to overcome environmental challenges and benefit from an upswing in contract demand.

AAX has worked to overcome a work shortage by targeting larger, globally diverse, higher value projects.

In the half ended 30 June, AAX strengthened its pipeline of globally diverse tender opportunities. AAX finished the half with 38 active tenders with potential work under management of US$16.5 billion.

The group also moved to offset market volatility by restructuring its business. Over the half, AAX completed its One Ausenco rebranding phase.

The rebranding occurred without AAX compromising its skill base whilst maintaining its high presence in the key geographic markets of MENA, India and China, particularly in key growth sectors such as energy, process infrastructure and program management.

AAX noted that 1H10 was characterised by early signs of a recovery in business confidence. Such trends have persisted, with data earlier this month confirming that Australian economic growth accelerated in the second quarter by 1.2%.

The result exceeded economist forecasts of 0.9% growth, and confirmed Australia as one of the world’s current economic powerhouses.

On an annual basis, GDP growth was 3.3%, which topped the 2.7% growth in the March quarter.

Divisional strength

Signs of an operational turnaround were evident across most of AAX’s divisions in 1H10.

The Minerals & Metals business line saw a revenue increase over the half to $119.3 million. The business line continued to win what AAX calls Evaluate (pre-feasibility, feasibility and conceptual design work) and Create (engineering, procurement and construction management) phase work during the half.

The $7 million worth of Evaluate phase projects awarded to Minerals & Metals during the period included studies for the Lumwana copper expansion and the Saudi Arabia gold heap leach project.

The $100 million of Create phase work won during the period included the Kestrel mine extension contract for Rio Tinto Coal and Xstrata Copper’s Ernest Henry mine expansion project.

The Process Infrastructure business line saw lower revenue in 1H10 owing to a stronger Australian dollar, project deferrals and generally lower levels of project activity in North America.

However, the Process Infrastructure business line was awarded several new projects during the half, including $20 million in Evaluate phase work in South America via new port facilities, trucking, rail and pipeline contract wins.

The Environment & Sustainability business line, which includes civil and geotechnical engineering services, actually hit record earnings and activity over 1H10.

Revenue for the division grew slightly to $23.8 million, as a result of the strong performance of the South American operations. The result was built on increased utilisation rates and greater early stage project assessment activities.

AAX’s Energy Business line saw solid progress in establishing and actively marketing three new strategic alliances with well credentialed partners in power generation, wind and mineral energy resource projects.

The Program Management business line benefitted over the half from tendering for new work in the program management space.

FY10 flops, outlook upbeat

On 25 August, AAX reported its 1H10 results.

Revenue from operations of $219.6 million was higher than the 2H09 result of $191.5 million, but down on year from $241 million.

An $8.1 million loss in underlying earnings compares to underlying earnings of $16.8 million in 1H09.

AAX said the result was reflective of continued investment in strategic growth initiatives, difficult market conditions and adverse foreign exchange movements (a stronger Aussie dollar).

Net operating cash outflow for the period was $7.4 million, a significant improvement on the $22.6 million outflow in 1H09, largely due to improvements in working capital management.

The group’s gross cash position at 30 June was $70.7 million.

AAX was upbeat on its future, noting recent project wins totaling US$1.5 billion support the company’s growth into 2011 and beyond.


AAX’s 1H10 results were fairly unimpressive, except for the group’s reduction of cash outflow and a record result for the Environment & Sustainability business line.

However, from an operational perspective, AAX showed signs of gathering momentum over the half, noting recent project wins totaling US$1.5 billion.

Already AAX has noted an improvement in its work backlog in the 2H10. The company is also experiencing modest improvements in utilisation rates and encouraging signs of the conversion of new work opportunities.

AAX admitted the 1H10 was challenging, but expects growth into 2011 and 2012 as benefits from current strategic growth initiatives crystallise and global business conditions continue to improve.

Over the last few months, AAX has continued to win a number of significant Create phase projects and, with market conditions improving clients are re-considering deferred construction projects.

The market appears to have been pricing in these encouraging signs, with AAX one of the hot stocks in recent weeks.

Going ahead, AAX may face challenges if the Australian dollar remains high. However, the last few days has seen the Aussie dollar scaling back from its near-94 US cent level.

In any case, AAX’s increasing workload should contribute to profits, offsetting the impact of a potentially stronger Aussie dollar.

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