DMG now doing a 180 degree turn from their earlier report, downgrading ausgrp to sell.

AusGroup reported a disappointing 3QFY13 results with a breakeven performance and a deteriorating order book. As our original turnaround thesis is undermined by the weak order flows and lackluster execution, we downgrade AusGroup to a SELL, TP SGD0.35, based on recent trough valuation of 0.77x FY14F book value.

 Gains in Major Projects and Fabrication segments offset by poor Integrated Services. Revenue fell 8% q-o-q and 24% y-o-y, while the EBITDA margin shrank to 4.3% from 8.1% in 2Q13. The bottom reversed from a AUD6.8m profit a year ago to a breakeven AUD0.1m this quarter. Management stated that the poorer margins are also due to variation orders in addition to weaker Integrated Services performance.

 AUD215m order book is less than two quarters’ work. At current run rates, AusGroup will run out of work within the year. The contract wins and better margins that were supposed to boost 3Q13 and 4Q13 results failed to materialise, and the downward march of the order book presents a dire outlook in the near term.

 Slash FY13F/14F estimates by 54%/48%. With this quarter’s breakeven performance in sharp contrast against management guidance, we slash FY13F estimates by 54%. Core earnings are likely to stay weak through FY14 unless a large quantum of orders is won at once. Successful claims of the variation orders present upside to our FY14F estimates, while provisions on the Karara Mining receivables is the main downside risk.

 Likely support near recent P/B trough. Earnings concerns are likely to dominate the relisting revaluation potential. Valuation is supported at the recent P/B trough of 0.77x (See Figure 2) which also corresponds to one standard deviation below its 5-year mean. We would become bottom-fishers around the 0.6x P/B range.

 Downgrade to SELL, TP SGD0.35. We peg AusGroup’s valuation to 0.77x P/B for a TP of SGD0.35 as the near-term ROEs of 6.4%-7.7% fall below cost of equity calculated at 10.4%. Key upside risks are i) Large contract wins and ii) Early claims of significant variation orders.

3rd Qtr results: http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_9E779337F9414C5748257B6A00334E8D/$file/AusGroupresultsannouncementQ32013.pdf?openelement

Not vested...