Investment Highlights 
''  A turnaround story. In its FY12 results, Ausgroup delivered a 63% yoy EPS growth to 4.9 AU cents per share. This is a strong recovery from its earnings trough in FY10, the period Ausgroup was hit by irrecoverable costs arising from rejected variation orders (VOs) claims. Ausgroup has since improved upon its internal processes on VOs, and showed strong improvements in net margins'FY12's 3.7% compared with FY11's 2.1% and FY10's 0.8%.

''  Strong orderbook trends; Ausgroup poised to bene't from a huge capex in Australia's mining sector.  Ausgroup is exhibiting good orderbook growth trends'58% CAGR since recent lows in 1HFY11. As at 2HFY12, orderbook stands at AU$420mil. We expect orderbook to grow in tandem with Australia's mining outlook backed by strong capex  'ows, particularly in LNG and oil and gas in the longer term. Committed projects in the iron ore and coal space should drive demand for Ausgroup's services in the shorter term.

''  A potential 18'20% earnings CAGR to FY16F.  With the stepping up of new CEO Laurie Barlow in Mar 2012, Ausgroup outlines a target to hit AU$1bil of revenues in 4 years. Barring a severe mining slowdown in Australia and execution risks, Ausgroup can potentially deliver ~20% earnings CAGR in the next 4 years, assuming latest quarter's ~4.7% net margins. Ausgroup aims to improve margins (to 6% in the longer run) through enhancing education and safety among its labour force, and better project execution.

''  Attractive value play'current price has yet to re'ect its growth potential.  Ausgroup currently trades at only 6.5x PER, which is cheap compared with a peer average of 13.6x PER. Additionally, a low PEG ratio of 0.33 strongly suggests undervaluation.

Key Risks 
''  Execution. The main risk to earnings likely lies in execution. A good execution by Ausgroup on the projects it undertakes'in the form of cost controls and time to delivery'will aid in net margin improvements. The converse is also true.

''  Rising labour costs in Australia.  Labour cost in'ation in Australia was ~4% in the past 12 months. Ausgroup's margins could be squeezed further if in'ation worsens, as a huge majority of its operating expenses is in labour.

''  Sustained fall in commodity prices.  A sustained fall in commodity prices such as oil,  gas, iron ore and coal could curtail investments and project commitments'and hence less demand for Ausgroup's services.

Source: AmFraser