Austin has manufacturing facilities in Australia, Indonesia and South America. The Australian facilities make, assemble, repair and maintain (on and off-site) products used in the mining and resources sector, with the main product lines including customised dump truck bodies, water tanks, excavator buckets and materials handling equipment.
Normally the stock market doesn’t like a capital raising through a share placement, as it dilutes the interest of the investors already holding the stock.
Especially when the company tapped the market through another placement just six months earlier, to pay down debt.
But when the reason given for the placement is to help fund stronger than expected orders – and the likelihood of more flowing from a larger tender pipeline – the market can easily be persuaded to take a different view.
That was the experience of Brisbane-based engineering company Austin Engineering Limited (ANG) in November. Austin, which serves mainly the mining and resources industry, followed up recent growth in contract wins and tendering pipelines by raising $8.4 million, through a significantly oversubscribed placement of 52.6 million shares at 16 cents, a 13.5% premium to its last closing price.
That was only six months after a share placement and two-for-one renounceable entitlement offer raised $29.8 million, at 8 cents a share, to reduce the company’s debt. That had also been the stated aim of a $51.6 million capital raising in July 2015.
However, far from resenting the quick return to the equity market, Austin investors over-subscribed the November placement, buoyed by news of a “strong set of orders” received for production in the December half, and a tender pipeline that was “stronger than in recent periods, with a large number of tenders under assessment and expectations of a high success rate flowing from these opportunities.”
The capital raisings repaired Austin’s balance sheet and placed the company on a stable and well-capitalised footing. They were all buttressed by the support of Thorney Investments, the investment company of billionaire Alex Waislitz, which owns 22.3% of Austin Engineering. Thorney helped lead the moves to recapitalise the ANG balance sheet and put the company in position where it could start to reduce its debt load. This gave Austin scope to focus on operational improvements, and complete its review of assets, to help it deal with the impact of the mining downturn.
While that support has been central to keeping the company alive, there is a flipside: Thorney (and its listed investment company Thorney Opportunities Limited) have played a highly active role in Austin’s affairs. Thorney was instrumental in ensuring the chairman did not stand for re-election at the annual general meeting (AGM) in November 2015, following an extended period of underperformance, and in the months following the AGM, the entire leadership team was restructured, also driven by Thorney.
Austin has manufacturing facilities in Australia, Indonesia and South America. The Australian facilities make, assemble, repair and maintain (on and off-site) products used in the mining and resources sector, with the main product lines including customised dump truck bodies, water tanks, excavator buckets and materials handling equipment.
The Indonesian production facility, on Batam Island, serves the equipment and service needs of mining and oil and gas-related customers in Indonesia and Asia. The US plant (Westech) based in Casper, Wyoming, services the US, Canadian and Mexican mining markets, and is an industry-leading designer and manufacturer of high-efficiency dump truck bodies and water tanks.
The operations located in Chile, Peru and Colombia manufacture, repair and maintain dump truck bodies and other mining products for their respective markets and, in Chile, also provide specialised heavy equipment lifting and transportation services for mining and industrial markets.
Austin’s site services divisions in its Australian and South American operations provide specialised field services to the mining industry.
Austin also owns rights to innovative and automated welding processes, which have been introduced into operations in order to improve production efficiencies.
As a mining services player, Austin has in recent years felt the pinch of cutbacks in in capital spending in the mining industry on the back of falling commodity prices, falling into loss in FY15 and FY16. The half-year loss of $22 million for the six months to December 2015 was its worst half-year since it listed on the stock exchange in 2004. In 2015 Austin took a $40.9 million impairment following a plunge.
From a share price peak of $4.37 in March 2013 – which valued Austin at more than $400 million – the shares slumped to 8.1 cents in June 2016. When increased share capital is taken into account, Austin’s market value fell from more than $400 million to $75 million.
In response, Austin turned its focus to the repair and maintenance side of the business, launching dedicated operations around the world to manage the shift. In February 2016 Austin bit the bullet and closed its manufacturing facility in Brisbane, where it made truck trays, coal screens and scrapers for the mining industry, after two years of losing work.
Austin also ramped up its activity in South America, which it had entered in 2009. In 2011 it won a lucrative contract supplying dump truck bodies in Chile: in January 2014 Austin won a massive three year supply contract with Brazilian mining giant Vale, which could be worth up to US$200 million ($267 million) by the time it ends. Subsequently, Austin has expanded into Bolivia, Columbia and Peru, as well.
Along the way, Austin fought off a takeover approach from fellow mining services group – and former major shareholder – Bradken.
Despite the loss of $40.5 million reported for FY16, things were starting to pick up for Austin. Despite the lower-margin repair and maintenance work generating the bulk of revenue, Austin said at the time of the FY16 result that it was starting to see encouraging signs in the second half of 2016, through an increase in orders for new and replacement truck trays, with the tray replacement cycle commencing in some mining truck fleets.
Over 2016, thermal (electricity) coal prices more than doubled to above $US100 a tonne; coking (steelmaking) coal more than tripled in price over the year, to more than US$300 a tonne; and iron ore doubled in price in the second half of 2016, to about $US80 a tonne. These rises were completely unexpected at the start of the year, but surprise economic stimulus in China, backed by a program of closing unprofitable steel capacity and mines, lifted prices quickly: while these elevated year-end levels are unlikely to be sustained, the improved environment certainly changed the mood in mining companies.
Austin said that in the first six months of FY16, its focus had been on debt reduction, which saw it end FY16 with gross debt of $52 million, down from $97 million at the end of FY15. By the time of the 2016 AGM in November, debt was down to $41.6 million, and the company said: “significant investor and strategic interest” was returning to the mining and services sectors, evidenced by Hitachi’s bid for Bradken and CIMIC’s bid for UGL.
The AGM heard that the significant repair work that dominated its order book in 2016 was likely to swing toward an increased manufacturing workload as the replacement cycle improved during 2017, and that the company expected to break even on an underlying basis the first half of the financial year. Despite this start to the year, Austin said it expected to generate normalised EBITDA (earnings before interest, tax, depreciation and amortisation) in FY17 that beat the $9.2 million reported in FY16.
Later in November, an updated trading report said that in November alone, Austin’s Perth operations had received additional orders for mining 27 trays, after successfully converting a client tender with a large mining company; its Wyoming operations had received an additional new order for eight trays from a large Canadian miner; the Indonesian operations had sold five trays that were part of existing stock; and the Hunter Valley operations had additional orders in place for two trays and a bucket.
The company said these orders reinforced Austin’s outlook and represented further encouragement for the start of the replacement cycle of trays in the mining industry. Austin noted that it had a “stronger current pipeline than in recent periods” with a large number of tenders under assessment and that it was clear that the landscape toward the end of 2016 was significantly better than the last two years.
The order book currently in hand supports Austin’s high levels of contracted work in the second half of FY17, which the company says should lead to a strong second-half underlying financial result. Trays, in particular, are starting to move, and Austin is looking at strong revenue boost and a likely improvement in margins.
No-one is talking net profit just yet. On Thomson Reuters’ collation, the analysts who follow Austin expect a loss of 0.2 cents a share this financial year, an improvement on the loss of 14 cents a share in FY16. But next financial year is projected to be much better – the analysts’ consensus estimate expects earnings per share (EPS) of 0.5 cents.
While that would price ANG, at 19 cents, on 38 times expected FY18 earnings, the stock price is likely to be re-rated upward as the earnings outlook improves. There is also takeover potential in the stock, with the buyer of Bradken – Hitachi Construction Machinery – and US mining equipment maker Esco both possible suitors. Either way, Austin Engineering appears to be a stock on the up.
