Austin Engineering Expands South American Footprint

This story features AUSTIN ENGINEERING LIMITED. For more info SHARE ANALYSIS: ANG

-Austin to gain synergies from Servigrut acquisition
-Iron ore business seen offset by subdued coal sector
 

By Eva Brocklehurst

Austin Engineering ((ANG)) has expanded its footprint in South America. Servigrut, a supplier of heavy equipment lifting, transportation and site services to miners and industrial clients in northern Chile, directly competes with Austin's established operations in the region. Hence, the acquisition has potential for substantial synergies.

Austin has stated it spends around US$1 million annually transporting product across Chile. The acquisition of Servigrut, which is based closed to Austin's operations in Antofagasta, will allow the company to transport mining products to sites across Chile using Servigrut equipment, at a significantly reduced cost. Moreover, Austin's Calama-based business – with which Servigrut competes – is its highest margin business. Austin will also be able to offer extra equipment and labour services for longer-term contracts. 

The consideration for the acquisition is $US21m with 50% paid up front and the balance due in 2014. The acquisition entails US$22.5m in assets and transfer of around US$7.8m in equipment finance leases. Moelis forecasts the acquisition will mean Austin offers a FY14 price/earnings ratio of 10.2 times and this represents a 40% discount to the Small Industrials sector aggregate. This looks undemanding but the broker considers earnings risk is still to the downside, because of the challenges facing the coal sector.

Austin's recent FY13 results showed the company well placed to take advantage of the solid demand from iron ore miners in Western Australia. Despite the cost savings being put in place across the mining sector, iron ore is growing in terms of volume. This bodes well for Austin's installed base as the company replaces worn out equipment.  Nevertheless, Moelis sees little change of earnings recovery in the coal sector, where prices are still poor. This is expected to offset the growth from iron ore clients. Hence, the prospects for the stock outperforming over the next year are limited. The company has stated earnings are expected to be biased heavily towards the second half of FY14 but the broker is inclined to wait and see further evidence that coal clients are resuming spending.

The broker thinks the balance sheet is solid, and gearing and interest cover of 53% and 9.7 times respectively is expected in FY14. This should offer scope for more accretive bolt-on acquisitions, if any that are worthwhile turn up.
 

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