In Boom Town Australia

 

BUY

 

Price

 

$1.83

 

Target

 

$2.39

 

Getting even hotter: Australia?s booming commodities markets

 

AusGroup Limited?s (AGL) core competence in fabrication, mechanical installation, industrial maintenance and machining offers investors exposure to Australia?s booming commodities sectors. Capital expenditure in Australia?s mining industry alone hit A$18.6bn in 2005-06 ? more than double the average annual expenditure for the past 25 years. Surveys indicate that this could further increase to A$23.0bn in 2006-07 and to over A$30.0bn in 2007-08. Over the medium term, A$91bn is expected to be invested in the Oil & Gas sector; more than A$30bn to be invested in the iron ore sector; and more than A$25bn to be invested in the non-ferrous mining & utilities sectors. AGL is well poised to capitalise on this upswing as engineering activities gather momentum in order to meet the rising demand for commodities.

 

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Favourable industry dynamics; technology to drive productivity

 

Australia?s commodities capex has been low over the past 20 years. This has consolidated players in the market and existing players have emerged stronger and better placed in this cyclical upswing. The consolidation has also led to a shortage of skilled workers in the industry which is a ?double-edged sword?. While it may slow down operational scalability, it also heightens the entry barrier for new players. In order to scale up its operations, AGL is targeting to spend A$25m to increase productivity and output by upgrading its facilities with new workshops and state-of-the-art equipment like robotics. AGL also intends to increase its work force from about 1,350 to about 2,000 in two to three years? time. AGL?s significant capex outlay reflects the group?s confidence in the industry prospects over the medium term.

 

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Targeting Singapore?s downstream O&G upswing

 

AGL together with Hertel (a European engineering group with a long-standing relationship with Shell and Exxon Mobil) is targeting Singapore?s multi-billion dollar downstream Oil and Gas project flows. Aside from Shell and Exxon Mobil?s two projects which will result in more than US$8.0bn in capex over the next few years, Singapore?s Economic Development Board is also planning to expand its Jurong Island initiatives which could see the island?s present 60-70 plants increase to 150 in the medium term.

 

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Proxy to the O&G Subsea market

 

AGL is also one of the better proxies to the growing O&G Subsea market which we expect will gather momentum in the medium term. Based on a PEG of 0.4x, AGL merits a multiple of 21.7x FY08 PE, which translates to a target price of S$2.39. Reite