AusGroup eyes turnaround under CEO Kimpton; banks on maintenance for recurring revenue

Kimpton set out two goals for AusGroup to achieve under his watch. First, its debt load had to be reduced. Second, they had to seek recur­ring revenue streams and rely less so on pro­ject-by-project contracts.

Fast forward to 2021 and AusGroup’s fortunes have somewhat improved as the price of oil lifts off its recent lows. In 3QFY2021 ended March 31, the company reported earnings of A$102,000 ($101,060), a reversal from the A$3.2 million loss a year earlier. This is despite the compa­ny recording a lower revenue of A$50.72 mil­lion compared to A$66.09 million a year ago.

In its earnings release, AusGroup says the drop in revenue reflects “lower than expect­ed recovery from the effects of the impact of Covid-19 throughout the year as a result of the postponement of client determined ‘non-criti­cal’ projects”.

In addition, gross profit increased by 112.8% to A$5.1 million in 3QFY2021 compared to A$2.4 million a year ago, thanks to a significantly im­proved gross margin of 10% versus a gross mar­gin of 3.6% in 3QFY2020.

The stronger bottom line was partly due to better operating efficiencies across the various operating segments, aided by subsidies from the Australian government as part of the sup­port measures to help the economy combat the ill effects of the pandemic.

Better still, the company managed to re­duce its once-crushing debt load. As of March 31, AusGroup’s borrowings stood at just A$62.8 million — a far cry from the A$150 million re­corded when Kimpton first joined.

Still, AusGroup’s share price has yet to re­flect its better financial health. Year to date, it was trading as low as two cents before jumping to almost four cents in late January. However, the share price has moderated over the course of the year. As of Aug 18, it closed at 2.3 cents, valuing the company at $73.52 million.

The effects of debt

In an earlier interview with The Edge Singapore in 2019, Kimpton had revealed that the compa­ny’s challenging debt maturity profile led to dif­ficulty in securing new contracts.

“When we tendered for work, Chevron, Rio Tinto and Woodside Petroleum looked at our figures and there was a major concern last year [2018] that all our debts were due in October. That phase is behind us, as the market and our clients see us more positively, in a different light now,” Kimpton says.

In 2014, when AusGroup needed recapitalisa­tion, offshore and marine player Ezion Holdings took a stake in it and injected marine services company NT Port and Marine (NTPM) into it for $55 million. NTPM provides fuel and ma­rine logistics at its facilities in Port Melville and East Arm.

Subsequently, AusGroup took on debt to fi­nance the port. This came to a head in 2018 when AusGroup had $75 million of medium term notes maturing on Oct 18, 2018, and DBS Bank would not extend a A$10 million loan to it beyond October.

All these developments were partially due to the effects of a multi-year slump in oil prices which cast a dark cloud over the entire offshore, marine and oil exploration sector which ranged from producers to those providing related sup­porting services such as AusGroup as well as struggling Ezion whose shares have been sus­pended since March 2019 while it restructures.

AusGroup then undertook many corporate actions to turn itself around, including reduc­ing the coupon rate for its medium term notes (MTN), restructuring its A$35 million loan from Ezion by partially converting it into AusGroup shares as well as a undertaking a rights issue and a share placement that raised A$46.8 mil­lion. The MTNs were also extended by four years to Dec 3, 2022.

Kimpton also used the revenue generated from AusGroup’s Inpex project to pay off some of its debt as well. The Inpex project refers to the 2014 contract to install insulation for the In­pex Ichthys LNG project in Darwin, which was worth about AS$197 million. The contract was then extended in 2017 to the tune of about A$165 million, where additional maintenance and im­provement works were included.

Last December, AusGroup was removed from the SGX Watchlist as part of a blanket re­view when SGX RegCo removed the minimum trading price (MTP) rule for Mainboard issuers.

Nevertheless, some analysts have already taken notice of how AusGroup has gradually climbed out of the hole. In an April 23 report by KGI Se­curities, analyst Joel Ng said that prospects in the firm may finally be “turning around” even if it isn’t “fully out of the woods yet”.

That’s beacuse Ng expects the group to see better days due to faster-than-expected growth in the Australian economy. Figures from Bloomberg have estimated Australia’s economy to grow by 4.4% in 2021 and 3.2% in 2022.

Ng notes that “as a major commodity ex­porter, the country also stands to benefit if the global economy picks up. Most recently, the IMF is projecting a stronger recovery for the global economy, and now expects the world econo­my to grow by 6% in 2021 and 4.4% in 2022, compared to its previous forecast of 5.5% and 4.2% respectively.”

He also points to the new LNG construc­tion projects and continued “significant invest­ments” in the resources sector, saying they are positive for AusGroup’s prospects in the next 12 to 24 months.

Recurrent revenue from maintenance contracts

As part of his efforts to turn AusGroup around and build a more sustainable business, Kimp­ton wants to build a stronger recurring revenue stream in the form of maintenance contracts. However, this will take time.

“We can’t just have one major construction project like an Inpex because they do come to an end. So, as a business, we need a sustaina­ble source of revenue coming through,” Kimpton says. The maintenance contracts provide a sus­tainable baseload of recurring revenue, he adds.

AusGroup has made a couple of significant in­roads recently in this area. The first is the signing of a contract with Esso in Thailand which was announced in last December. AusGroup, over a five-year contract term, will provide specialised scaffolding and insulation maintenance servic­es. These include skilled labour, scaffold mate­rial, scaffold design and procurement.

Another major win was a 10-year mainte­nance master contract awarded by Chevron Aus­tralia in March to AusGroup subsidiary AGC In­dustries. It is the longest maintenance master contract awarded to date in the Australian oil and gas market and brings AusGroup’s order book to over A$1 billion.

In a press release, the company says this “milestone supports the long-term future for AGC” and that between 300 to 500 addition­al local planning and execution personnel are expected to be recruited in Western Australia.

The 10-year master contract enables Chev­ron Australia to order full-service asset mainte­nance from AGC across Chevron’s onshore and offshore natural gas and oil production facilities located in the north west of Australia.

AusGroup says the contract will see it deliv­er a “diverse and complete range of services” including, painting insulation and fireproofing (PIF), scaffolding, including engineering servic­es, as well as procurement and maintenance.

In the KGI report, Ng says the Chevron con­tract is estimated to generate at least A$100 mil­lion per annum for AusGroup. Maintenance contracts such as these form about a third of the group’s normalised revenue and provide a stable base compared to project-based works, a view that is echoed by Kimpton.

Ng adds that other project-related works should start to resume in 2HFY2021 as clients have largely delayed their projects since last year when the pandemic broke out, according to AusGroup’s management.

In addition, Ng expects earnings to recover going forward, with “upside potential” as the group secures more projects and maintenance contracts.

Besides trying to win more maintenance con­tracts, Kimpton is trying to diversify into oth­er end markets and not be constrained by oil and gas. For example, AusGroup is one of the few contractors who have built lithium plants in Australia and it has managed to secure con­tracts in the resources and minerals sector with clients like FMG and Rio Tinto in the country.

“Most of our work is in Western Australia, and you can’t not be in the iron ore area or in the lithium area or in the gold area. Because that is a big part of the business,” he reasons.

For longer-term growth, Kimpton is look­ing to expand AusGroup’s business beyond its market of Western Australia. Although he does acknowledge that there is “a lot of work” to be done, he does see “opportunities” across the country in eastern Australia.

Internationally, in addition to the Esso con­tract in Thailand, the company has also signed a Memorandum of Understanding (MoU) with JEL Maintenance to jointly pursue maintenance contract opportunities in Singapore.

In a press release dated May 28, the two sides revealed they will share technical knowl­edge and experience as well as collaborate on the development and execution of new business opportunities in Singapore and other markets.

For now, KGI’s Ng prefers to maintain some caution over AusGroup’s prospects. He notes that there’s “key overhang over the value of its port and marine business, which accounted for 47% of non-current assets and 26% of total as­sets as at Dec 31, 2020”.

“We will have to closely monitor the commer­cialisation of its port and marine business giv­en that its auditors issued a disclaimer of opin­ion on its FY2020 financial statements. This was mainly due to PPE and intangible assets worth A$38.7 million related to the port and marine business,” writes Ng.

The business recognised some A$50 million of impairments in FY2020 due to a lack of ac­tivity during the Covid-19 pandemic.

“On a positive note, we understand that AusGroup has taken measures to commercial­ise this asset and we will likely see progress over the coming quarters, which should help to allay concerns over future potential impair­ments,” he adds.