Acquisitions Seen As A Boost For Ausenco

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This story features EQUINOX RESOURCES LIMITED.
For more info SHARE ANALYSIS: EQN

By Chris Shaw

As commodity prices continue to move higher the demand for mining service companies also increases and this, plus the company’s expansion from a specialist minerals engineer to a provider of a full range of services across the life of projects, has been a driver of the share price gains of Ausenco ((AAX)).

The company yesterday announced the acquisition of port and bulk material engineering systems group Sandwell and environmental and energy sector service group Vector Engineering for just under $120 million, the acquisitions increasing the spread of the group’s service offering such that it now operates not only in the gold and copper services sectors but in the oil and gas facilities, port construction and slurry pipes sectors as well and is now a market leader in each of the latter two.

Austock Securities, which rates the stock as a Buy, has lifted its earnings estimates as a result of the acquisitions but taking a conservative approach expects an increase of around 8% compared with guidance of a 15% increase. The changes see the broker forecasting earnings per share (EPS) of 71c this year, up from 66c previously, 85c in FY09 against 79c previously and 95c in FY10 against 87c previously.

UBS estimates the acquisitions will be around 10% accretive to earnings and has lifted its forecasts accordingly, its EPS estimates moving to 74c this year from 70c previously and in FY09 to 98c from 88c, while ABN Amro’s revised normalised EPS forecasts are 69.4c and 85.9c respectively.

With the acquisitions adding to earnings and increasing the scope of the company’s services the deals are viewed positively, but Austock notes there are some potential issues such as the impact of losing key personnel and the fact that entering new markets means risk increases.

On the plus side UBS points out the operations of the newly acquired companies are centred in North and South America and this means the company will reduce its exposure to countries with less stable political environments, while the move into new areas to complement the gold and copper market exposure should also prove beneficial in the longer-term.

The other issue in Austock’s view is the fact the Lumwana contract with Equinox Minerals ((EQN)), worth a little over $200 million to Ausenco, is now around 75% complete and as this brought in around one-third of group earnings there will be something of an earnings hole that requires a new contract to be addressed. While it suggests the company has a good chance to win the Lumwana uranium contract and this would fill the gap, this is not yet a guarantee and so some risk remains.

On balance ABN Amro suggests earnings risk is weighted to the upside post the acquisitions, while factoring in the issue of shares via the institutional share issue and share purchase plan to partly fund the acquisitions increases the broker’s  DCF valuation on the stock to $15.21 from $12.66.

The broker’s price target stands at $15.22, while post the adjustment for the acquisitions Austock has lifted its target to $14.40 from $13.50 and UBS to $16.00 from $15.00. Thomson One Analytics shows a median share price target of $14.25.

UBS and ABN Amro are the only brokers in the FNarena database to cover the company and with the stock trading well below their respective price targets both have retained their Buy ratings post the news of the acquisition.

Shares in Ausenco today are slightly higher and as at 2.05pm were up 19c at $12.68, which compares to a range over the past 12 months of $5.68 to $16.24.

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