Ausgroup

Ausgroup: earlier this wk, Augroup reported dismal A$15.1m loss in 1Q14 that shaved off 9% of the group’s book value in the quarter itself. Without a gain on asset sales of A$10.4m, the loss would have been even higher at A$25m (15% of book value). The key concern is the non-budgeted costs that have been recurring every quarter from Ausgroup’s contracts in hand, which suggests that its orderbook as a whole is unprofitable. Revenue slowdown sharply (-44% q/q) caused by a weak orderbook as well as Ausgroup’s inability to secure targeted projects. Meanwhile its high labor costs means overheads cannot fall as quickly as revenue. Further, Ausgroup disclosed it has breached the EBITDA covenants under its banking facility agreements expiring in Jan ’14. The banks involved have formally advised that they “reserve their rights” with respect to the loans. Management says “it is currently in the process of reviewing options to replace these facilities”. OSK-DMG notes that the possibility of a cash crunch, while somewhat remote at this juncture, cannot be dismissed. Plagued by a series of problems, OSK-DMG reiterates its Sell rating, cuts TP to $0.24 pegged to 0.67x FY14e book value that is dwindling amid continuing losses.