AusGroup at serious insolvency risk: OSK-DMG

The banks have pulled their lines.

According to OSK-DMG, AusGroup announced that it: i) has repaid all senior bank debt, ii) is in discussions with a number of parties to provide the group with working capital and contract bonding facilities, and iii) has AUD219m of work in hand.

OSK-DMG said it is negative on AUSG for its increased insolvency risk as banks have pulled their lines, while its work in hand is unprofitable.

Here's more:

Banks pull lines. AUSG has repaid its senior debt facilities, which were AUD27.9m in 1Q14 against its balance sheet cash of AUD34.8m. Cash-ex-secured-debt was thus AUD6.9m. However, 1Q14 bank overdrafts were AUD8.8m, suggesting that AUSG is at serious risk of insolvency.

Quid pro quo for working capital negative for outlook. We see AUSG accepting lower margins for future contract work in return for working capital and so-called contract bonding facilities, and higher interest rates if these parties are financial lenders. Either way, AUSG’s future margins will suffer, delaying its return to profitability.

On-hand order book likely unprofitable. AUSG made an AUD21m gross loss in 1Q14 at an AUD77m topline, and only broke even in 3Q-4Q13 at AUD138m revenue. We believe that the current contracts on hand will fetch negative EBITDA margins, given the recent experience and slow recognition being unlikely to cover overheads. The AUD219m orderbook is insufficient for even two quarters of breakeven performance.

We expect continued losses for FY14F, and our recovery-to-profitability scenario is pushed out to FY16F. The negative-EBITDA position today also means that AUSG is burning cash, causing further deterioration in its balance sheet position.

Most dire chapter in AUSG’s history. AUSG has never, since its 2005 listing, faced the prospect of a full-year loss, and its 1Q14 AUD15m loss (after the AUD10.4m cushion of asset sale gains) was the largest quarterly loss on record. With a book-to-bill flow ratio well below 1.0x, the dwindling orderbook presents a dire outlook, further exacerbated by the cash crunch today. Our TP is lowered to SGD0.21 based on 0.65x FY14F P/BV. Maintain SELL.