AusGroup missed in its 2QFY13 results after being hit by the twin barrels of project closing costs and variation orders. The former are legacy contracts which mgmt. explain have been flushed through the order book, and we expect the latter to be
reclaimed in future quarters, boosting future profits and margins. The higher-margin order book on hand now and record tender book point toward much better results in 2H13 and FY14F. We maintain our BUY call, with a slightly lower TP of SGD0.73.

Revenue maintained at AUD150m, but gross profits fall 18%. The core business ran at a consistent pace at the top line, but margins fell due to the reasons stated above. We estimate the VO costs to be about AUD2m, which should be recoverable in future quarters. This flowed through slightly higher fixed costs (due to additional support services in preparation for the M&A we expect) for a 46% hit on the bottom line to AUD2.8m.

Significant contract award delays weakened the turnaround this year. Five months ago, AusGroup stood on the cusp of receiving large contract wins from major oil & gas projects like the Gorgon LNG project. Today, we are still waiting for these contracts to be awarded, and this has correspondingly delayed the full turnaround. We adjust our revenue forecast down by 8%/9% in FY13F/14F, and our bottom line expectation by 13%/19%.

Healthy order book, record tender book, highest level of committed stage projects ever in Australia. AusGroup has a healthy AUD308m order book, and a record AUD4.5bn tender book today. We expect the company to convert 20% of its tenders into contracts. The strong tender book is in line with the industry backdrop, which at AUD268bn of committed stage projects is the highest in the country's history, double the level two years ago. Notwithstanding the hiccup in the current quarter, we see strong growth in coming quarters - higher revenues, the margin reversion toward the industry average net margin of 7%, and AusGroup's ongoing M&A plans to buy into some Queensland companies.

Maintain BUY, adjust TP slightly to SGD0.73. DCF value SGD0.90. We value AusGroup at 9x blended FY13F and FY14F EPS, taking into account the very positive industry backdrop for FY14F and beyond. Our TP is nudged down to SGD0.73 from SGD0.755 due to the delays as mentioned above, which should be clearing up with firmer macroeconomic news from the US and China, as well as sustained high oil prices and a recovering iron ore market. Our DCF model values this cash-generating company at SGD0.90 (See Figure 5).

 Source: OSK