Speaking at Morgan Stanley’s 6th Annual Summit on the Domestic Small-Cap Big Ideas panel, Lead Portfolio Manager Oscar Oberg presented a high conviction stock pick, Austin Engineering (ASX: ANG).
Lead portfolio Manager Oscar Oberg (second from left) speaking at the Morgan Stanley Summit.
Austin Engineering manufactures and supplies specialised mining products such as buckets and truck trays that boost production for mining clients globally. Austin Engineering is held within the WAM Capital (ASX: WAM), WAM Microcap (ASX: WMI) and WAM Research (ASX: WAX) investment portfolios and the investment team believe the mining services firm can close to double over the next 12-months and graduate from a micro-cap company to a small-cap company. This reflects the company’s cheap valuation of 8x on a price to earnings valuation relative to its expected 25% earnings growth in FY2025 and the potential the team sees for earnings accretive acquisitions.
Austin Engineering’s current CEO David Singleton was appointed in 2021 when the share price was trading at 12 cents, following the company expanding too rapidly at the end of the 2012 mining boom and needing to strengthen its balance sheet. Our initial catalyst to buy shares came following our experience with David during his time at shipbuilding company, Austal. We first bought shares in Austal at $1.80, which more than doubled as David improved Austal’s margins on their key United States project, surpassing market expectations and contributing to the share price reaching a high of $4.50/share in 2019.
Over the past two years, two of Austin Engineering’s three divisions (North America and South America), have outperformed given a buoyant mining industry and the need to replenish and refurbish heavy machinery. Revenues in the company’s largest division – Asia-Pacific, have been strong but margins have been weaker due to rising labour costs pressuring margins in Western Australia. Around 12 months ago, management decided to shift a high proportion of its business in Australia to Indonesia which operates at much higher margins. Furthermore, management have initiated their AustBuy procurement strategy to consolidate steel buying across the group. We believe these strategies will have a positive impact on margins in FY2025 that can beat analyst expectations.
This combined with the potential of an earnings accretive acquisition, could see Austin Engineering’s profit increase to over $50 million in the next two years on our estimates, compared to the $30-33 million ANG that has been guided for FY2024. As a result of stronger than expected earnings growth, we think the company’s valuation can rerate from 8x, at present, to 10x. If this happens, we believe the share price can increase more than 58% to over $0.90 per share.
