Austin Engineering (ANG) Among Best of Ze Best [Archive] - Page 2

Sauce

04-07-2010, 11:06 AM

Drworm,

With a monty second half It looks like ANG are going to land FY10 NPAT pretty damn close to your 19.41 example (EBIT guidance now 25.5 - 27.5m). I suspect the earnings contributed from South American operations will be better than forecast. And of course the low rates of tax there will have a positive effect on NPAT. They are a bigger and better earning machine now than they were pre capital raising and the real benefits still to be felt and yet more expansion under way.

I don't think many people realize exactly how exciting the opportunity that Austin is currently capitalising on is. The Miners in South America have relied on importing their capital goods, which is horrendously expensive. By manufacturing locally with "limited or NIL competition" Austin are effectively a Price Maker in South America. Their margins are huge and their prices can flex with input costs. I believe finding businesses with these kinds of economics and market opportunities in today's highly competitive and developed world is like finding a needle in a haystack.

So EPS could be down 5-10pc on FY09. ROE somewhat diluted this year, but watch ROE rocket back up as effects of expansion flow through to earnings. I suspect FY11 NPAT will be well above 21.5m and that Austin will experience tremendous growth over the next few years.

What do you think of the latest announcement Drworm?

Sauce, Let's continue here.

Here's the NPAT breakdown in the order of 1st half, 2nd half, full year ($millions).

FY09 8.13 6.70 14.83
FY08 4.66 6.88 11.54
FY07 2.33 2.57 4.90

On the 03/08/2008, Austin completed their acquisition of Conymet Business for US$19.2m

And for the acquisition Austin mentioned that it will contribute.

Noted that it might be a bit conservative, I'll give a little leeway and say that translates to AUD$4.5m (US$4m) EBT or AUD$3.15m after tax.

Let's also say they emulate their best half-year results ever (1st Half FY09) for both halves of FY10 - $8.13m x 2 = $16.26m. Plus the South American acquisition's contributions + $3.15m = $19.41m.

Looks pretty good over last year's $14.83m?

Unfortunately, between 22/06/2009 and now the shares on issue grew 47% (47,141,412 to 69,314,403) - most of which occurred between 22/06/2009 and 27/07/2009. The weighted shares increase from FY09 to FY10 is probably around 45%. In order for FY10 to have the same EPS as FY09, they'll need to make an NPAT of around $21.5m.

And as you can see, I'm using pretty bullish figures here. Personally I don't think for FY10 ANG can post a NPAT of $19.41m - it would probably be in the $16-17m range. Can it reach NPAT of $21.5m for FY11? Well, I can't see that as a certainty either.

So for me... FY10 EPS will be definitely under FY09's. EPS for FY11 might be on even par with FY09.

I still think it's a good company by the way, but perhaps not as cheap as some think it is.

What do you think Sauce?

Sauce

04-07-2010, 02:25 PM

Mr Fitch has again stated a belief that South American earnings to be greater than Australian earnings in the future. He has said this before, but the difference now is they are over there doing it successfully rather than just conducting analysis, so I think it's rational to give serious credence to this statement now.

ANG grew free cash flow has from 2.2m in 2007 to 8.8m in 2008 to 15.5m in 2009. Predominantly from Australian earnings. With higher margins, lower tax, less competition and a huge market in South America.. it will be interesting (mouth watering?) to see how much free cash they can generate in the next few years.

Commenting on the South American expansion plans Chairman Peter Fitch noted “These expansions have been part of our strategy from the time we purchased our first business in Chile in 2009. We have been operating in South America now for close to one year and upon further research we have firmed our belief that we have a unique opportunity to establish Austin as the number one player in the range of products and services that Austin produces. We also believe that South America will provide the majority of the group’s earnings in years to come following the strategic expansions into the important mining regions of Chile, Brazil, Peru and Colombia.”

Sauce

08-07-2010, 01:45 PM

Hello
Anybody out there still holding/following?

heres some very rough envelope calcs

The second half FY10 earnings look certain to be nearly 50% higher than first half (15-16m vs 11m).

Pilbara Hire acquisition to add 3.3m annual EBIT FY11, plus management expect increasing earnings due to new sales pipelines

Brazil JV to start producing goods and adding to earnings July 2010 (now)

Expansion of production facilities in Chile to include JEC products to be complete later this year and add to second half earnings

New facilities being built in indonesia will add $2m EBIT in 2012 and $4m EBIT in 2013

New repair & maintenance facilities in Chile being constructed for completion late 2011.

Three more likely acquisitions in the wings. Also, these engineering businesses are being acquired on 3-4x multiples and plugged into a business trading on a 10-13x multiple.

So,

If current operations (excluding new facilities or businesses) provide $30m ebit in FY11 (last 6 months x2, no growth) and expanded facilities and new businesses provide another $6m then numbers might look something like this:

FY 2011
EBIT $36m +38%
NPAT $25.2m +35%
EPS 36.5cps +30%

And then of course 2012 significantly better again as facility construction and other expansion effects flow through.

This could end up being conservative, as factors in no organic growth or earnings from further acquisitions. Of course main assumption is that last 6 months was normal, rather than an anomaly, however I suspect that since first half suffered due to lag effect of GFC, that things more likely to get better from here rather than worse. GFC2 type macro dramas aside.

I think growth of 30%pa for next three years is not optimistic based on all current information.

I would love to hear other peoples views and opinions on ANG or above analysis, perhaps someone would like to poor cold water on my enthusiasm. ;-)

Cheers
Sauced

mark100

08-07-2010, 02:03 PM

Hi Sauce, I have a modest holding. I agree its cheap but so are a lot of companies at present. The reason I hold some ANG is it's cheap and there is a high chance something happens with BKN in the next 6-12 months.
Southern Cross Equities cover ANG. They are forecasting EBIT for FY11 and FY12 of $35.4m and $39.2m and NPAT of $25.5m and $28.2m. So your figures look spot on

COLIN

08-07-2010, 03:01 PM

Sauce: I bailed out of ANG when they started heading south, in May (after which, they promptly recovered! Such is the penalty for not being sufficiently highly skilled at reading all the technical signals, I suppose.) But I still hold FGE which you introduced me to. FGE has performed better than ANG on a year-on-year basis, but I am aware that the situation has now reversed, somewhat. Time for a re-assessment, I think.

Sauce

08-07-2010, 07:49 PM

Hi Mark

It's pretty hard to fathom what BKN will do they would have to raise a lot of fresh capital or offer cash+scrip as their balance sheet doesn't look like it would sustain swallowing ANG. But clearly they have some plan. It's interesting because it would be rational for them to do something sooner than later to avoid having to pay a high price once all the new earnings streams are live. Of course their 19.9pc stake will turn out to be a shrewd investment if they just sit on it.

I think you would leave a lot of money on the table by selling to BKN should they launch a bid, unless the offer was so high it compensated for the coming growth in South America over the next few years...

Thanks for the Southern Cross Equities forecasts Mark, much appreciated. I will email them and see if they care to share their research with me.

Thanks for your post Mark. I think a good reason for holding ANG is simply the phenomenal growth prospects, current market dominance (over 50% of dump tray market in aus) and compelling "price maker" status in South America due to first mover advantage in huge market with limited competition. A capitalist dream.

Hi Sauce, I have a modest holding. I agree its cheap but so are a lot of companies at present. The reason I hold some ANG is it's cheap and there is a high chance something happens with BKN in the next 6-12 months.
Southern Cross Equities cover ANG. They are forecasting EBIT for FY11 and FY12 of $35.4m and $39.2m and NPAT of $25.5m and $28.2m. So your figures look spot on

mark100

08-07-2010, 08:05 PM

Hi Sauce,

I am assuming if BKN make any sort of move they would either launch a capital raising or make a scrip bid. Look at Banpu's bid for CEY. Up to 19.9% and then a bid followed very soon after. You rarely move to a 19.9% holding for just investment (or strategic) purposes. A 10% holding is enough to be strategic.

As a tip for getting research, Bell Direct now offer free research for all their clients. So when I saw the ad a few weeks ago I signed up online as a client and then did the paperwork to become a 'trading client'. I have no intention of trading with them but now I can view Bell Potters small company research and Southern Cross Equities research (as Bell Potter now own SCE). I don't rate the Bell Potter research too highly but I have a bit more respect for SCE

Sauce

08-07-2010, 08:49 PM

Colin, good to hear from you.

I am amazed you sold such a gem like Austin. If I had to choose between FGE and ANG to hold for 10 years if I could only pick one it would be Austin Engineering by a long margin. I still own FGE but don't feel I have much of a grasp on their business. I like the numbers (they were stupidly cheap back then), and I like the sector, and that's been enough for me to make a small and profitable (so far) investment in FGE . The deal with Clough destroyed immediate value for shareholders and it remains to be seen how much value it gives back. Still seems to have a margin of safety at current levels, but I simply don't feel I understand it well, and clough deal might be a red flag.

But I have a much larger investment in ANG and for me, it is a much much clearer picture.

I strongly recommend you read a book called Common Stocks and Uncommon Profits by Phil Fisher (A favorite of Warren Buffett's who says his investment philosophy is 85% Ben Graham and 15% Phil Fisher).

Here is an excerpt that might be of interest:

"There is a much greater chance of being wrong in estimating adverse short term short term changes for a good stock than in projecting its strong, long term price appreciation."

"It has been my observation that it is so difficult to time correctly the near term price movements of an attractive stock that the profits made in the few instances when this stock is sold and subsequently replaced at significantly lower prices are dwarfed by the profits lost when timing is wrong. Many have sold too soon and have either never gotten back in or have postponed reinvestment too long to recapture the profits possible."

I use this example because of your comment about not being skilled at reading technical signals. I suspect there are people out there who can trade short, medium and long term trends profitably, but I am definitely not one of them, and one of the best pieces of advice around is to know where your competence is and to stick within it. I suspect you, like me, might have more success simply buying into quality businesses and sitting Colin.

P.s. It might be a mistake to not get back into ANG because you sold at a slightly lower price recently, if the share price ends up being double in a few years. of course i don't know what the share price will do, but I am very confident the business will improve considerably in the next few years. this is not advice to do anything with real money of course!

Sauce: I bailed out of ANG when they started heading south, in May (after which, they promptly recovered! Such is the penalty for not being sufficiently highly skilled at reading all the technical signals, I suppose.) But I still hold FGE which you introduced me to. FGE has performed better than ANG on a year-on-year basis, but I am aware that the situation has now reversed, somewhat. Time for a re-assessment, I think.

Sauce

08-07-2010, 08:58 PM

I am assuming if BKN make any sort of move they would either launch a capital raising or make a scrip bid. Look at Banpu's bid for CEY. Up to 19.9% and then a bid followed very soon after. You rarely move to a 19.9% holding for just investment (or strategic) purposes. A 10% holding is enough to be strategic.

You are probably right Mark, perhaps it's simply my wishful thinking. I hate the idea of losing Austin, and I don't particularly want to own any Bradken. To provide a more positive example, look at Leighton's who took a 19% stake in McMahon and sat on it forever without doing anything!

Thanks for the great tip Mark, I will look into it immediately. In the meantime any excerpts or cut and pastes you can share with the sharetrader community from their ANG research would be very well received (by one reader for certain!). Have a great day Mark.

Cheers
Sauce

h2so4

08-07-2010, 09:27 PM

Sauce

08-07-2010, 10:11 PM

I think you are right mark. This looks a perfect opportunity for BKN.

Strategically Austin is a perfect fit, and now with BKN losing ESCO products and going head to head with them in GET market, a business like Austin makes a huge amount of sense. As annoying as that is.

Sauce

08-07-2010, 10:21 PM

From a recent article on Highgrade regarding Bradken's consumable expansion post ESCO:

We believe the cessation of the ESCO arrangement in June 2011 will benefit the business significantly in the medium term, said analysts at RBS Equities. HighGrade couldnt get any of the authors to elaborate by our deadline, but Bradken is understood to be preparing to expand sales of its own mining consumable products in global markets where it has been constrained by the ESCO deal.

eeek.

mark100

08-07-2010, 11:17 PM

Sauce, formatting is probably all over the place here

Strong earnings guidance & Pilbara acquisition
Buy
Price
$3.48
Target (12 months)
$4.20
Pilbara equipment repair & maintenance business acquired
ANG will fully debt fund the business which they acquired for $13m on a FY10e
EV/EBIT multiple of 3.3x. We estimate the acquisition is likely to be 10-11% EPS
accretive initially and makes solid strategic sense as it will allow ANG to provide
customers with a complete package including design, manufacture & now repair &
service.
Indonesian expansion
The Board has also approved the company’s initial expansion into the Indonesian
market, with a $12m purpose built manufacturing facility to be developed at Batam
Island over the next 8-11mths. The business is expected to deliver $2m EBIT from
FY12e, lifting to $4m by FY14e.
Corporate appeal remains
We continue to believe ANG has strong corporate appeal & note Bradken (BKN) has
continued buying ANG shares on-market, most recently increasing their stake to
19.8% paying a high of $3.40/share.
We maintain our BUY rating and have lifted our target price to $4.20 (from $3.80).
Disclaimer: SCEQ in Jun’09 was a Joint Lead Manager for the $26m placement to fund the acquisition of a
leading Chilean steel dump truck body business for A$24.8m for which it received a fee.
ANG provided strong FY10e EBIT guidance of $25.5-$27.5m
vs. SCEQ $23.6m (consensus $24m). Annualising 2H EBIT
implies the base business is currently tracking at $29-$33m
pa excluding the Brazilian JV which will contribute from
FY11e (~$1.5m EBIT est.), today’s Pilbara acquisition (~$4m
EBIT est.) and expansion plans (Indonesia, Hunter Valley &
Colombia etc). We’ve upgraded our FY10-12e NPAT & EPS
forecasts and retain our BUY recommendation.
Absolute Price Earnings Forecast
Year end 2009 2010e 2011e 2012e
NPAT (reported) (A$m) 14.7 20.1 25.5 28.2
NPAT (adjusted) (A$m) 14.7 19.4 25.5 28.2
EPS (adjusted) (cps) 31.0 29.0 36.8 40.6
EPS growth (%) 26% -7% 27% 10%
PER (x) 11.2 12.0 9.5 8.6
P/Book (x) 4.6 2.8 2.3 1.9
EV/EBIT (x) 11.2 9.2 6.9 6.2
Dividend (¢ps) 8.0 9.0 11.5 14.0
Yield (%) 2.3% 2.6% 3.3% 4.0%
ROE (%) 35.1% 27.8% 26.3% 24.2%
Pilbara acquisition & positive earnings
guidance
Pilbara acquisition
Austin Engineering (ANG) has announced the acquisition of a Pilbara based onsite
fixed and mobile mining equipment repair and maintenance business.
ANG acquired the business for $13m, implying a 3.25x – 3.5x EV/EBIT multiple on
FY10e EBIT of $3.7-$4.0m from FY10e revenues of $20-$22m.
Given ANG’s strong balance sheet (~$7m net debt at Dec’09) the acquisition will
be fully debt funded from existing undrawn debt facilities, and add $2.2-$2.7m
NPAT (10-11% accretion) based on our estimates.
The business began operating in 2006 and has quickly established a strong
presence with a number of customers common to ANG. The business was wellknown
to ANG management prior to acquisition, with ANG having previously
used their services on a number of occasions to undertake service, repair and/or
warranty work on ANG products on-site.
ANG had also received numerous requests from some of their larger clients to
expand their operations to include an on-site repair and maintenance capability in
the Pilbara so as to provide a more complete package for customers. Following
the acquisition, ANG will not only provide design and manufacture services for
products that include dump truck bodies, excavator buckets and service vehicles
etc, but now also repair and on-going solutions on-site in the Pilbara.
We note ANG’s strong historical record in acquiring and integrating businesses
and expect this acquisition to deliver solid benefits for ANG shareholder’s going
forward given both its strategic and immediate financial benefits.
Indonesian expansion
ANG’s board has approved a $12m development of new manufacturing facilities
in Indonesia.
The facility will be located at Batam Island, a free trade zone which will provide
the company with a number of financial concessions, but more importantly
establishes a platform for ANG to supply its products into the strong Indonesian
market where coal is a key resource.
Notably, ANG has previously supplied some products to Indonesian customers. A
strong A$, additional shipping costs and more expensive labour costs in Australia
however have meant that it’s been very difficult for ANG to compete on price,
and service Indonesian customers from Australia. With local operations which are
likely to be completed over the next 8-11mths, we’d expect ANG will be well
positioned to achieve some strong growth in this market with an initial EBIT
contribution in FY12e of ~$2m, which is expected to lift to ~$4m by FY14e.
An additional benefit of having operations established in Indonesia where labour
and operational costs are expected to be significantly less than Australia, is that it
will allow ANG to ‘flat-pack’ items from Indonesia into its Perth operations to
cover periods when the business is running at maximum capacity.
Austin Engineering Limited (ANG)
Page 3
Earnings guidance and changes
ANG has released FY10e earnings guidance with EBIT expected to be in the
range of $25.5-$27.5m. This was 8%-16.5% ahead of our $23.6m forecast and
consensus at $24m.
Notably this implies 2H10e EBIT of $14.5-$16.5m, or $29-$33m on an annualised
basis for the base business. This compares to our previous FY11e EBIT forecast
of $29.8m that included a $1.4m initial contribution from the newly formed
Brazilian JV. Excluding the Brazilian JV, we’d previously forecast FY11e EBIT of
$28.4m, which is 2%-14% below the 2H10 run-rate.
Following today’s Pilbara acquisition, Indonesian expansion and earnings guidance
we’ve upgraded our forecasts which are shown below. Approximately 10-11% of
the overall 13% FY11e NPAT and EPS upgrade is attributable to the Pilbara
acquisition.
Figure 1 - Earnings forecast changes
SOURCE: SOUTHERN CROSS EQUITIES ESTIMATES
Corporate appeal
We believe ANG has strong corporate appeal given:
• Its well known and highly regarded product profile;
• Intellectual property through its Westech brand;
• Proven track record and ability to successfully integrate acquisitions; and
• Open register
While there are a number of potential acquirers, Bradken Limited (BKN) is the
most obvious, particularly given that it appeared on ANG’s register late in 2008,
and has more recently increased its holding to 19.8%, paying up to $3.40/share
earlier in the week.
Equally, ANG’s attractive South American growth profile could easily attract
interest from global mining services companies.
Additional acquisition opportunities
Management has also recently indicated that it was reviewing further acquisition
opportunities to further supplement the company’s strong growth. These include:
• a Hunter Valley business; and
• a company that provides parts for a number of the company’s products
on a worldwide basis; and
• a proposed Colombian expansion (ANG has commissioned Austrade to
indentify and find potential acquisition targets).
New Old % chg New Old % chg New Old % chg
EBIT ($m) 26.4 23.6 12% 35.4 29.8 19% 39.2 35.1 12%
NPAT ($m 19.4 17.6 10% 25.5 22.6 13% 28.2 26.9 5%
EPS (¢) 29.0 26.5 9% 36.8 32.6 13% 40.6 38.8 5%
DPS (¢) 9.0 8.5 6% 11.5 10.0 15% 14.0 12.0 17%
FY10e FY11e FY12e
Austin Engineering Limited (ANG)
Page 4
Austin Engineering (ANG)
Company description
ANG is a heavy engineering business which manufactures, supplies and services mining
products for the resource sector. Primary products include dump truck bodies, excavator
buckets, service vehicles and tyre handling equipment.
Australian manufacturing facilities are located in Brisbane, Perth, the Pilbara and Mackay.
Overseas, the company has a presence in the American state of Wyoming through its
subsidiary Westech and a Middle Eastern presence through a JV in Oman. More recently,
ANG acquired the assets and intellectual property of Conymet, a Chilean steel dump truck
business, and has also established a JV with a local engineering firm in Brazil called Delp
Engineering.
Investment thesis
We rate ANG as a Buy and believe ANG is well placed given:
• its strong balance sheet and acquisition growth potential;
• the advent of a ‘replacement cycle’ during 2011 for its steel dump truck bodies
which have been supplied in Australia since 2008;
• potential to double the size of the business should management successfully
execute the expansion of the business into South America; and
• potential corporate appeal.
Valuation
Our target price for ANG is $4.20 (from $3.80) and is based upon an EVA based
methodology. Our EVA methodology determines the appropriate EV/EBITDA multiple,
adopting 10.0% pre-tax WACC and 2.5% long-term growth.
Risks
The mining services sector (as a function of the resources sector) is largely driven by the
cyclicality and macroeconomic fundamentals.
Some of the key risks to our valuation and investment thesis include, but are not limited
to:
• Cyclicality of the resource sector. In times of recession and periods of weak
economic growth, the need for mining-related services and products has
historically reduced significantly.
• Appreciation of the A$. ANG generates revenue from selling a number of its
products internationally. On translation into A$, a strong A$ relative to the local
currency in which the underlying sales are occurring reduces the value of the
foreign currency denominated sales.
• Acquisition and integration risk. ANG’s near term growth is dependent on its
ability to successfully execute and integrate its South American expansion plan.
• Key management. Being a small-cap mining services company, ANG is
dependent on the skills and experience of key staff for the execution of strategy
and day-to-day running of the business. A strong board and key management
have been integral to ANG’s success since listing in 2004, and the loss of key
management poses a risk to the business.
Austin Engineering

h2so4

09-07-2010, 08:44 AM

Thats a "fair" valuation, thanks for posting mark.

BKN must be busting at the bit.

BKN sp is currently selling at a "fair" value so a scrip offer on any take over bid would work out very favourably for them.

h2so4

09-07-2010, 08:57 AM

After thinking about it I think there is still a reasonable margin of safety in SCEQ's $4.20 val on ANG.

Sauce

09-07-2010, 09:47 AM

Mark,

Thanks very much for sharing that information. I am wrapped to see my reasoning is identical to SCE's...

ANG is a rare horse indeed. Few businesses on the ASX have performed as well over the last 7 years and yet the prospects are even better today than before.

That reminds me of a great quote from Charlie Munger "we like to buy businesses that offer us 50/50 odds and pay 3 to 1" perhaps even Fermat & Pascal would have approved of a wager on ANG.

Cheers

Sauce

P.s. Of course its impossible to quantify so far out, but from a quick glance at their numbers for FY2012, I can't help but think EBIT 39.2 might prove to be conservative, if you look closely at ANGs expansion plans it becomes clear that much of it will not flow through to earnings until late 2011 and early 2012, and EBIT potential is quite high in that year. Of course a lot will depend on success of South America, and if all their operations continue to experience at least the same workload.

Sauce

09-07-2010, 10:03 AM

SCE make a great point in that report about ANGs product life cycle - i.e. the trays are basically consumable, with a 3-4 year life.

They bought Westech in 2007 and sold truck loads of these things (excuse the pun) throughout 2008 and beyond, so we are only just coming in to the replacement cycle in 2011. This will surely help to underpin workload going forward as their customers hit their respective replacement cycles, starting in 2011. And there were some massive orders..

From Marks SCE report:
• its strong balance sheet and acquisition growth potential;
• the advent of a ‘replacement cycle’ during 2011 for its steel dump truck bodies
which have been supplied in Australia since 2008;
• potential to double the size of the business should management successfully
execute the expansion of the business into South America; and
• potential corporate appeal.

Sauce

09-07-2010, 10:13 AM

After thinking about it I think there is still a reasonable margin of safety in SCEQ's $4.20 val on ANG.

I think you are probably right h2s04.. If you do run any numbers on ANG I would love to see them. I have been trying to do DCF for ANG but then numbers are coming out rediculously high. These spreadsheets I have seem to break down completely with less than 10 years of data, I need to learn how to do DCF manually but every time I look into it my short concentration span causes my eyes to glaze over..

h2so4

09-07-2010, 11:15 AM

Well here is a very crude way to do it.

I think you said something like 30% growth is achievable. For the next 20 years that seems highly unlikely.(I know its a fantastic company but at that rate it would end up with cashflow well over 14b)

Assume ANG can double its income from 19m to 38m in the next 8 years and have no growth after that for the remaining 11 years.

On a sheet of paper list 1 to 20 and put your cash in for each year ie year 1. 19m +9% = 20.7m year 2. 20.7 +9%= 22.5 etc years 8 to 20 will be all the same because of 0 growth.

Then total it up and thats your cashflow.
Discount the total cashflow to give you your return, say 9%, then divide by number of shares, and hey presto thats your share price valuation.

Sauce

09-07-2010, 11:54 AM

Thanks for this h2s04,
I agree on growth rates, I have been using median growth of 18% for 10 years and 5% thereafter on my broken spreadsheets.. I will have a play

h2so4

09-07-2010, 12:41 PM

You need 10 years of figures to be confident of a median 18% growth rate. Just work with what you have.

ANG is a fat guy, how fat? Doesn't matter. Remember the quote 99% art and 1% science.

I like the ANG story, and I think a BKN bid is better than 50/50 odds.

Looking to enter soon.

Sauce

09-07-2010, 01:48 PM

So very very true h2so4, and good point! And another quote along the same lines, from Buffett this time: "you only have to be mostly right" !!

You need 10 years of figures to be confident of a median 18% growth rate. Just work with what you have.

ANG is a fat guy, how fat? Doesn't matter. Remember the quote 99% art and 1% science.

Looking to enter soon.

Sauce

09-07-2010, 02:06 PM

Agree odds of a BKN bid at some point much better than 50/50. And I guess this provides some downside buffer (and is probably why ANG has held up so well during ASX recent 15% slump). However, Assuming you are confident of ANGs prospects, it's a definitely a mistake to assume BKN buyout even at a premium price is a good thing

Unfortunately with 3000 small shareholders, it will probably be lambs to the slaughter and everyone will leave money on the table for the acquirer.

You need 10 years of figures to be confident of a median 18% growth rate. Just work with what you have.

I like the ANG story, and I think a BKN bid is better than 50/50 odds.

Looking to enter soon.

Sauce

09-07-2010, 02:09 PM

By the way h2so4

Im glad your on ANG - good buying right now in the mid 3's...!

ajs

29-07-2010, 09:33 PM

COLIN

29-07-2010, 10:21 PM

Hi to all the sharetrader contributors.My first post on any site and I thought it fitting to comment first on this brilliant ''ang best of ze best'' thread.Thanks to everyone Ive found it very informative.
Sauce you asked the day any other ang holders out there?.Well Im a huge ang fan and in fact this is my favorite Australian company.
My top 3 companies in order of investment are
1 ryman health
2 Austin
3 Forge
After reading all of your comments over a number of years I can say my investment philosophy and ideas are very much in line with yours.
I would just like to ask your thoughts on
1 portfolio size. How many stocks do you invest in?.(I've got 5)especially when 2 out 3 here are in same industry.
2 Can you suggest any other companies that might be worth running a ruler over?
In the beginning 3 odd years ago I had too many companies that met my criteria and now that I have my favorite 3 in mungers words,unless it is better than what you currently own don't buy it.
In advance, any reply will be much appreciated
Cheers

ajs: A big welcome. Sauce, in particular, will be delighted to have another ANG enthusiast aboard.

Sauce: After your earlier expression of surprise that I had bailed out of ANG you will be interested to learn that I did buy back into the company a few weeks ago. That sudden drop in May had spooked me. From an F/A viewpoint I should probably not have left, but I could not ignore the technical indicators. Then the T/A position seemed to change quite convincingly, so I bought in again but, of course, at a higher level than where I sold. However, its the direction that counts, and indicators such as the On Balance Volume and Accumulation Distribution seem to be telling me that I am in the right place at this point in time, although the company hasn't really outperformed the Index over recent weeks.

ajs: If its any help, I also hold your other top stocks, i.e. FGE and RYM. As to the ideal number for a portfolio, there is no definitive answer, I am afraid. In my case I hold far, far, too many - I would be embarrassed to tell you how many, spread between my name and my wife's which I manage. Trouble is, I just don't like to have too much percentage exposure to any one entity, no matter how "solid" it might be, or how the price is trending; some people would call this practice "deworsification" rather than diversification. I am also an "active investor" rather than a "long term holder".

As to your question about "other companies worth running a ruler over" I can only recommend that you keep casting around the postings on this forum; over the years I have found this helpful in pointing me to possibilities. But, of course, you then need to do your own research. These days I am more guided by technical analysis - relying heavily on trend directions - than on fundamental analysis, but you are probably more comfortable with the latter.

A couple of names for you to consider perhaps (in keeping with your apparent investing style):
NZX: MFT. ASX: SIV.

Sauce

30-07-2010, 11:02 PM

Hi to all the sharetrader contributors.My first post on any site and I thought it fitting to comment first on this brilliant ''ang best of ze best'' thread.Thanks to everyone Ive found it very informative.
Sauce you asked the day any other ang holders out there?.Well Im a huge ang fan and in fact this is my favorite Australian company.
My top 3 companies in order of investment are
1 ryman health
2 Austin
3 Forge
After reading all of your comments over a number of years I can say my investment philosophy and ideas are very much in line with yours.
I would just like to ask your thoughts on
1 portfolio size. How many stocks do you invest in?.(I've got 5)especially when 2 out 3 here are in same industry.
2 Can you suggest any other companies that might be worth running a ruler over?
In the beginning 3 odd years ago I had too many companies that met my criteria and now that I have my favorite 3 in mungers words,unless it is better than what you currently own don't buy it.
In advance, any reply will be much appreciated
Cheers

Hi Ajs
Great to have you on board and posting. I also lurked on these boards for a long time before posting!
I like your portfolio !

It seems we share things in common
My portfolio also has five shares
My top three holdings are the same as yours but in a different order
I also started investing with a shotgun approach and owned many stocks

These days I believe in a concentrated portfolio of businesses that you feel you truly understand. Of course I am still working hard on the latter part of that sentence.

Regarding shares to look at?

Well i am reasearcing Sedgman and Decmil on the ASX at the moment. Mostly for comparative purposes (due to my exposure to engineering sector) but I am discovering they both look like very solid businesses. I highly doubt I will buy any however; your Munger quote sums up the reason well. I also love Mungerisms!

I am also looking closely at Pumpkin Patch on NZX but just started and haven't formed an opinion just yet..

Are you looking at anything yourself Ajs? I am very happy with the way my capital is allocated right now. I am dedicating my time to learning and trying to understand these businesses and their competition as well as I can.

Cheers

Sauce

Sauce

30-07-2010, 11:20 PM

ajs: A big welcome. Sauce, in particular, will be delighted to have another ANG enthusiast aboard.

Sauce: After your earlier expression of surprise that I had bailed out of ANG you will be interested to learn that I did buy back into the company a few weeks ago. That sudden drop in May had spooked me. From an F/A viewpoint I should probably not have left, but I could not ignore the technical indicators. Then the T/A position seemed to change quite convincingly, so I bought in again but, of course, at a higher level than where I sold. However, its the direction that counts, and indicators such as the On Balance Volume and Accumulation Distribution seem to be telling me that I am in the right place at this point in time, although the company hasn't really outperformed the Index over recent weeks.

ajs: If its any help, I also hold your other top stocks, i.e. FGE and RYM. As to the ideal number for a portfolio, there is no definitive answer, I am afraid. In my case I hold far, far, too many - I would be embarrassed to tell you how many, spread between my name and my wife's which I manage. Trouble is, I just don't like to have too much percentage exposure to any one entity, no matter how "solid" it might be, or how the price is trending; some people would call this practice "deworsification" rather than diversification. I am also an "active investor" rather than a "long term holder".

As to your question about "other companies worth running a ruler over" I can only recommend that you keep casting around the postings on this forum; over the years I have found this helpful in pointing me to possibilities. But, of course, you then need to do your own research. These days I am more guided by technical analysis - relying heavily on trend directions - than on fundamental analysis, but you are probably more comfortable with the latter.

A couple of names for you to consider perhaps (in keeping with your apparent investing style):
NZX: MFT. ASX: SIV.

Glad you are back on board ANG Colin lots of growth to come in my opinion.

Cheers

Sauce

ajs

31-07-2010, 04:14 PM

ajs

31-07-2010, 04:42 PM

Sauce

31-07-2010, 06:35 PM

Hi Sauce/Colin
I have at home what I refer to as my 3 bibles.
The Warren Buffett way(Sauce there is a mention on owner earnings here)
Common stocks uncommon profits
One up on wall street
All 3 state very clearly you need to know what you own.
Invest within your circle of competence.Opposing this is don't have too much exposure to 1 company or sector.
Munger stated he was happy to own as little as 3 stocks.
Now heres the thing,if 2 of 3 are proctor and gamble & johnson and johnson ,you have diversification!
This then for me is an area I'm interested in your thoughts and oppinions.

cheers

I agree with Munger. As he points out, many businessmen and wealthy families have almost their entire wealth in ONE business, which is of course how they became wealthy.

In my opinion there are two scenarios; you either do not have the capacity or motivation to master the knowledge needed to invest successfully in a concentrated portfolio - in which case you should simply by an index fund and keep regularly adding to it from the earliest age possible.

OR

you do have the capacity and motivation to learn enough about business, economics and psychology to successfully invest in a concentrated portfolio of shares in which case thats what you should do.

Personally I think I may well fall into the first catagory, yet be attempting the approach of the second, which is likely to result in a flapping action followed by permanent loss of capital.

Portfolio theory and diversification is all fine and dandy, but at the end of the day if you end up owning 30 stocks can you really say you understand every single one of them enough to warrant investing in it? When the Sh*t hits the fan, everything gets pummeled. Diversification won't protect you from 'the big one'. It spreads your research time to thin to really know whats going on in any single stock and exposes you to mistakes. It invariably dilutes your returns as much or more than it protects them. Invest in 1 - 5 of the best of the best and follow it/them (the business not the share price) like a hawk and try and know each business inside out.

Alternatively regularly invest in a passive index fund for the long term and enjoy your day job. That's true diversification and your aggregate returns over the long run will be satisfactory, especially if you start young and invest more in bad times than in good.

I have not read One up on Wall Street. I think Common Stocks and Uncommon profits is an excellent book that describes many qualitative factors I have not seen elsewhere. If you haven't read them already, read Snowball: The business of life and Charlies Almanack: The wit and wisdom of Charlie Munger. Not exactly manuals to invest by, but fantastic reading, and much general wisdom that will help you with both life and investing.

Cheers
Sauce

h2so4

01-08-2010, 11:19 AM

I

Personally I think I may well fall into the first catagory, yet be attempting the approach of the second, which is likely to result in a flapping action followed by permanent loss of capital.
Sauce

Sauce don't even think about it or write about it. You are far,far,far from that.:)

Sauce

01-08-2010, 08:42 PM

haha I hope so h2s04! time will tell, as they say ;)

Sauce

01-08-2010, 09:05 PM

To round out the picture (could be viewed as confession time)My no 4 and no 5 companies are Nms & Wds.

Colin I sold down my Mft last year because I didn't believe they had a durable competitive on the international stage and I bought into Nms.
(No more comment required on this brilliant strategic plan).

Back to your question Sauce;on the radar,Mms (refer P Lynch automatic data processing)
Orl & Idl.

p.s Do your number 4 and 5 investment companies expose you to minerals/oil gas/China stories also ??

thanks for your time

Sorry to digress so far from the Ang theme!

Hi sorry I just noticed this post ajs!

THanks for this. MMS and ORL have some VERY compelling numbers. I don't know anything about them but I think they both look like excellent candidates for further research,

I am not overly concerned with China worries - and no, contrary to holding ANG and FGE I am not a mining service addict!

I think it makes sense to go deep and long on the business offering the best prospects and the best value. rather than to spread it around a few that all look miss-priced and you like the sector.

If China explodes, so be it, If that happens, find some cash, because it wont just be mining service stocks that get hammered!

Cheers
Sauce

COLIN

02-08-2010, 03:42 PM

To round out the picture (could be viewed as confession time)My no 4 and no 5 companies are Nms & Wds.

Colin I sold down my Mft last year because I didn't believe they had a durable competitive on the international stage and I bought into Nms.
(No more comment required on this brilliant strategic plan).

Back to your question Sauce;on the radar,Mms (refer P Lynch automatic data processing)
Orl & Idl.

p.s Do your number 4 and 5 investment companies expose you to minerals/oil gas/China stories also ??

thanks for your time

Sorry to digress so far from the Ang theme!

ajs: Pity about the timing of your investment in NMS, but you will have noticed the more promising trend of more recent times; I recently bought into them.

Of the other ASX names you mention: the one that got me excited was MMS (which I have not researched before, as far as I can remember) - to the extent that I have today added them to my ever-diversifying (!)portfolio. Their 6-month charts look impressive, and I note that they have outperformed the general index by about 240% over the past 5 years; if they can maintain that sort of performance over the next 5 years I will be well pleased.

(There doesn't seem to be a dedicated thread for MMS so I will open a new one, cross-referenced to here.)

COLIN

10-08-2010, 11:33 AM

Sauce

10-08-2010, 10:09 PM

I see that Bradken have just announced some pleasing profit results for the full year, with significant improvement in second half. NPAT up 20%, and a 62% increase in div. They also state that they are still looking for complementary acquisitions, so maybe they will do something about increasing their holding in ANG, maybe even a full takeover, which seems a distinct possibility.

Hi Colin,
If they want to increase their stake they will have to make an offer for all the shares as they are at the 19.9pc limit. I have a feeling that they will be content to sit on their 19.9pc blocking stake for awhile.

I have been playing with my spreadsheets again.

If anyone is interested here are my results for ANG

Assumptions:
Discount rate = 12pc
FY10 EPS = 27cps (I suspect they might do better than this: 27 - 29cps)
FY11 EPS = 36cps
Average ROE since listing = 27%

Current value = $3.78
Value in 2011 = $4.34

I think this is reasonably conservative considering there is considerable upside potential to the historical average ROE of 27% in coming years.

Cheers

Sauce

ajs

11-08-2010, 10:40 PM

Hi Sauce and co,
Always interested in any of your comments Sauce.

Whats got my thoughts going at the moment is this whole possible Bkn takeover.
Looking at the amount of agressive expansion that Ang is taking on at present with all the execution risk that goes with that,
I just can't see Bkn wanting to interfere with that at this time, if indeed they do want to aquire the bussiness.
It's a big aquisition for Bkn and it can't be done with debt!

I just hope our wee honey can show them a clean set of heels, share price wise over the next 6 to 12 months, and it all might get too hard!!

WARNING I'm only 3 years into my 5 year apprenticeship here and so this is very much I'm of the oppinion.

Here's to crossed fingers for the next year or 2

regards

Sauce

11-08-2010, 11:20 PM

Hi AJS

Cool, I'm glad your with me on not wanting any action from BKN. I don't want to give up future gains for a short term premium. And I certainly don't want to swap my ANG for any BKN shares. It's hard finding good businesses like Austin, and to be quite honest, I can't really be bothered having to find somewhere else for the funds in a hurry!

It's going to be very interesting. Austin appears to be an extremely strategic fit for BKN. They are looking to globalise their GET products business in a hurry after losing the ESCO licence, and Austin's engineered mining products are a good fit with BKNs product lines and customers. They clearly want Austin, but I just get this feeling that it might be more about having a blocking stake for now so it doesn't get swallowed by someone else, with a view to making a move in the future.

It might be proven to be wishful thinking, we will see!

Cheers for your thoughts AJS. I see Mr Kerr was buying RYM on market today.

Regards,

Sauce

Sauce

14-08-2010, 11:49 PM

This article is an article I found on Westech from a trade journal from all the way back in Sep 2008. Nice overview of the advantages of the Westech trays providing some insight as to why they have been so successful in Australia, and also some insights into the trade that was going on in South America by way of license before Austin stepped in and stole the party:

Heavy equipment builder Westech is, in some respects, a commercial conundrum. Located in Casper, an isolated city of 65,000 on the windy, mile-high plains of central Wyoming, USA, Westech has historically maintained a low profile that could almost be described as hiding in plain sight-were it not for the thousands of haulage truck bodies carrying its name at mines around the world, making it quite likely the largest body supplier in the business.

Preferring word-of-mouth recommendation over marketing and advertising fanfare, Westech has forged what seems to be a highly successful business model out of two principal elements: staying close to the customer, and giving its customers what they want. For example, the company designed and delivered 42 different body styles in 2007 alone, including models from its line of water tanks as well as both OEM-style and customized haulage bodies.

Overall, of the 8,000-plus bodies shipped by the company since 1969, about 4,500 are in the 35- to 85-ton-capacity range, with the remaining 3,500 or so sized at 100 tons of capacity or more. It has provided bodies for all of the major OEM truck builders, including Caterpillar, Komatsu, Liebherr, Hitachi and Terex, and will have built four bodies that will be on display at various exhibits at the upcoming MINExpo trade show in Las Vegas, Nevada. Its geographical proximity to the surface coal mines in northeastern Wyoming's Powder River Basin and the Alberta oil sands operations has resulted in a large number of its ulta-lightweight bodies going into service at both locations.

The company, which originated as a machine shop to fabricate oil field equipment in 1938, also manufactures dragline buckets and shovel dippers for one of the largest OEMs in this sector of the business; and designs and builds other types of mine support equipment such as cable reels, water tanks, service trucks and front end loader buckets. Its main manufacturing and design facility in Casper encompasses about 165,000 ft^sup 2^ of covered assembly space on 55 acres of land. During a recent visit by E&MJ, the facility was churning out finished truck bodies at a rate of about 20 per month, using up roughly 1,000 to 1,200 tons of steel per month in the process. According to Westech CEO Harold "Bud" Allison, plans are being considered to expand the facility and raise output.

Westech has an agreement with Cainsa, a major mining house in Chile, whereby Cainsa is licensed to market, manufacture and sell Westech-designed truck bodies. Cainsa has manufacturing facilities in Santiago and Antofagasta, Chile.

Westech was acquired in 2007 for $19 million by Austin Engineering Ltd., a publicly traded, Queensland-based engineering and manufacturing company with facilities in Brisbane, Perth and Mackay, Australia. (Westech also had a licensee agreement with Austin Engineering prior to the acquisition.) The transaction, according to Westech Sales Manager Rich Peters, has helped both companies by increasing their overall market reach.

According to Peters, orders continue to be strong, with deliveries in Australia totaling more than 126 bodies' year to date with more deliveries pending manufacturing, and continued strong order volume in North America. Earlier this year, Cainsa secured orders for 52 bodies from a major Chilean mining company. Customers in Brazil have taken delivery of 27 bodies with negotiations for additional bodies in the future, and Cainsa also has booked orders for 15 bodies to date from other customers in Latin America.

All of Westech's truck body design work is conducted in-house. The process starts with a site visit to identify the customer's requirements and evaluate site conditions and practices. Westech personnel photograph the mine's haulage trucks at various points along the haulage route, determine the possible range of loading equipment that will be used with the haulage fleet, identify material characteristics and density and consult with mine management. The resulting information is fed into a truck body profile form that is the basis for initial design.

With Westech's goal of developing the lightest possible body that will fill a customer's service requirements, there's a close focus on the actual angle of repose of the material being hauled at a specific mine, noted Chief Engineer Rick Reynolds. Rather than depend on theoretical SAE guidelines for estimating the volumetric carrying capacity of a truck body, Westech uses its photos of the truck taken along points in the haul route to computer-model a specific design. "The angle of repose for a load can change from the loading point to arrival at the dump," Reynolds explained. As the angle of repose changes, the amount of freeboard-the space between the material and the top of the body's sidewalls and tail-changes as well and this becomes critically important in the design of a lightweight body.

"We want to take away unneeded steel and let the customer put that weight back into the payload," said Reynolds.

Another vital element in body design is establishing the proper one-third/two-third axle splits, or proportion of weight carried by the truck's front and rear axles during a haul. With various grades encountered along a haul route changing the actual weight splits, it's important to distribute the load in a manner that will maintain the proper splits throughout the haul to avoid premature wear and damage to the truck's tires, frame and drive components. One simple method of ensuring the body is loaded correctly is by welding a large arrow symbol to the top outside rail of the sidewall, clearly visible to the loader operator and showing precisely where the material should be dumped for proper distribution in the body.

By using Finite Element Analysis (FEA) Westech's engineers have been able to add strength to a body's frame rails while actually subtracting overall weight from these components. "We'd rather design [the frame rails] right from the start rather than just throw weight at [the problem]," said Reynolds. With the trend toward ever-larger loading equipment, Westech has also strengthened the ribs supporting the body's front wall, again using FEA to identify stressed areas that need reinforcement as well as areas in which material can be removed to save weight.

Other features that enhance body performance and service life include replaceable sidewall top caps that can be easily removed, with new caps able to be welded in place with very little downtime. Keeping in mind that older mines may have truck repair shops with less overhead room than newer facilities, Westech offers a variety of canopy designs that can reduce or eliminate restrictions on how high the body can be raised inside the bay.

Other features include a curved transition between the body's front wall and floor, and chrome-steel corner transitions, both of which contribute to more efficient dumping and less carryback; body heating setups designed to customer requirements; and placement of ANSI certified personnel tie-off points around the body.

Peters pointed out that Westech has one of the largest paint bays of its type in the U.S., allowing the company not only to handle bodies up to 400-ton capacity but also to "get creative" with its finishing touches.

Quite possibly the most challenging goal the company has set for itself, said Peters, is designing body styles that "meet the fleet"-that is, fitting not just one version of a truck in use at a single mine, but all or almost all versions of the truck currently being used by the customer. "We actively pursue the collection of data regarding a customer's fleet inventory and try to design a body that will work with their entire fleet. Have we been perfect? No, but we work very diligently to meet our customers' requirements. We've been very successful."

ajs

15-08-2010, 05:52 PM

Hi Sauce
The sharing of information on this site is invaluable.

This sort of information is the stuff that matters! Thank You.

Managed to scrap up enough for another wee nibble on ang on thursday.

Just a point on Ryman when comparing to other companies. I think the figure to focus on is not ROE but ROIC.
Reason being is the equity part of the figure gets distorted over time.

I am really looking forward also to the FGE result, in My humble oppinion this company looks really exciting!
I've been looking hard at "The competitive advantage" and I know it revolves around "The Hub".
Food for thought???????

kind regards
ajs

COLIN

16-08-2010, 03:16 PM

Looks like the market has failed to be impressed with today's results announcement, despite record NPAT (up 30%), an increased dividend, and an optimistic outlook. I haven't had time to look too closely at all the detail but I did notice that revenue was down 20% notwithstanding the addition of 11 months trading by the Chile JV and the contribution from Oman.

Sauce: I would be interested in your analysis, in due course. Thanks.

mark100

16-08-2010, 04:12 PM

Relative to other mining services businesses ANG is expensive at the moment I sold straight after the result. Short of a takeover I think ANG will struggle to push past $3.60 until management firms up some numbers for next year

Sauce

16-08-2010, 04:42 PM

FY10 EPS = 27cps (I suspect they might do better than this: 27 - 29cps)
Sauce

at 28.24cps EPS bang on what I thought, so no surpises there. ROE still high but diluted from cap raising as was to be expected. From a very quick look at presentation and results:

On the negative:

* No light at the end of the tunnel in north america yet.
* Middle east looks like it will provide less income in FY11 perhaps.
* Company is benefiting from increase in margins rather than revenue growth

On the positive

* Upside is that South American expansion is progressing at or ahead of expectations.
* Enourmous increase in margins (looks like efficiencies were made accross all operations, so increase not just due to high margin south american business)
* More australian and South American expansion imminent.

I think the increase in new payment terms and subsequent increase in working capital is rather large negative but was flagged by the company earlier in the year, so shouldn't be any suprise. And this may not be a permanent change of course, but I will certainly be treating it as if it is.

H2s04: This I believe is a great case for adding changes to working capital to your cashflow calculations. I don't yet really understand how relevant working capital is to RYM considering its inventory is in long term assets.

Does anyone know why a strong second half and weaker first half is such a regular theme for Austin. Is there some sort of seasonal effect to sales of mining capital goods? I wouldn't have thought so.

Austin have weathered the GFC amazingly well. FY11 will be interesting - Aside from the acquisitive growth in Australia, I think South America will be the earnings driver.

Kind regards,

Sauce

Sauce

16-08-2010, 04:53 PM

Sauce

16-08-2010, 04:55 PM

RCR trades on PE of about 7 or 8 but is expensive in my opinion.

Fodder7

17-08-2010, 01:30 PM

I have sold out of ANG following this announcement despite holding the stock since 2006. My basic reasons are:
- Something funny seems to be going on with their margins. How does a company that is experiencing falls in revenue during an expansion find their margins increasing dramatically. Doesn't make sense to me and I worry something is being hidden...
- I have noticed a general change in the ANG language over the past 12 months towards more promotion and spin. They will tend to focus on whichever metric best supports their case. Lately they focus on NPAT and carry on about a 'record year' while brushing falls in EPS and revenues under the carpet.
- The general tone seems to be changing to an acquisition based strategy as apposed to the knuckle down and get to work attitude they had when the SP was 50c.

Love to be proved wrong and buy this stock again in the future but right now I don't see the upside I used too.

Sauce

17-08-2010, 02:30 PM

Hi fodder

Some good points there. I agree completely that "record year" is patronising. Regarding the increase in margins this has been well flagged - the EBIT margins in South America are over 30% and they pay less tax there, so the south american contribution was always going to increase their overall margins. Plus their margins before the GFC were over 17%. during the GFC they got squeezed by several factors including higher steel costs. They since benefited from much lower steel costs. But more importantly ANG put a lot of emphasis on increasing productive efficiency - something they have also been very vocal about. Margins over 18% is an excellent result but a bit hard to see how it could be suspicious!

ANG have always grown through acquisition and have always stated this is their strategy. I think you will find the revenue dip is more to do with the lag effect of the GFC, as their orders take a long time to complete and mining companies put the brakes on in 2008/9 and are only now firing up again. I can't see any reason why they won't post solid EPS growth in 2011 and beyond.

However, ANG have done a few dubious things in the past. Raising capital from shareholders while paying them dividends in the same year is a destruction of wealth. As is raising capital at the bottom of the GFC diluting current shareholders in favour of institutions and new shareholders. I have so far not been worried. I believe that managements reasoning is that the timing of the South AMerican purchase and expansion was critical and will add more value than was lost in reasonably short time.. 2011/12 will tell. Timing of cap raising was a double edged sword.

Happy holder for now.

Cheers

Sauce

ajs

20-08-2010, 09:56 PM

Sauce

21-08-2010, 07:22 PM

Hi folks,
I see Sauce in amongst the preliminary statement we got the Ingenieros Chile numbers.(They might have got the Grrrrr)
Revs 13,440,000 and npat 3,210,000. for 11 months. That's impressive profitability early on!!

Taking that out of "Americas revs 38,641,000 - 13,440,000 = 25,200,000 revs for north america this yr, compared to 58,000,000 last yr, shows how far their activity levels are down.

Cash flow number was low this year@ 13,710,000. I guess this has to do with changes to working capital?.
Do any of numbers on cashflow statement change to compensate? Can anyone help on this?.Would appreciate it.

Hope I've got My facts and figures right!

regards
ajs

Hi AJS. Absolutely agree with your thoughts. I spent half of friday working on a spreadsheet of the revenues from each segment for each half going back three years. Its a fascinating analysis to do. And indeed the US is over half the revenue of previous year, and 30% under their first year forecast when they purchased it!

No light at the tunnel in the US. While its a shame, as they would have smoked it if the US was performing, it really doesn't matter that much. Chile NPAT margins are unbelievable at 24%! compared to about 7% for the group. (npat not ebit).

You only have to look at what happened in Australia when they have previously expanded production facilities to see what will happen in Chile when their new workshop is ready.

And remember, margins in the second half increased largely due to the efficiencies found in manufacturing longer runs (larger orders!) in Australia because of the efficiencies in the repetitive process inherent in making more of the same product. That's really good news on two fronts!

I think 36cps will be easy for 2011.

Although they are very vocal that things are in the toilet in the US and not likely to improve, I really don't like the fact it appears they would rather hide the $ values to be discovered rather than simply announce them out loud. I really hope management are not more worried about the value of their options than keeping their owners informed.... Its a big black X mark over the company in my opinion.

I will hold because I believe their South American expansion is too compelling and I would leave easy money on the table by selling now... but feeling a bit wary.

Sauce

21-08-2010, 07:25 PM

Hi folks,

Cash flow number was low this year@ 13,710,000. I guess this has to do with changes to working capital?.
Do any of numbers on cashflow statement change to compensate? Can anyone help on this?.Would appreciate it.

ajs

Yes increase in working capital will lower cashflow. They are also embarking on heavy growth capex which also effects the cashflows. I need to go back and look at it, but I am woefully hungover so not right now.

Sauce

21-08-2010, 08:05 PM

I think 36cps will be easy for 2011.

I should qualify that by saying that I have done some basic forecasting based upon their current growth capex and pilbara acquisitions and the stated returns they expect. The other major assumption I have made, is that the improved conditions as seen in second half results will continue (except US of course).

I also now believe that the second half results will be larger than first half because of the timing of completion of expansion projects, not because of reduced revenues in first half like last year.

Also, I have not included effect of any further acquisitions in my numbers and it looks like more are on the cards.

Sauce

21-08-2010, 08:09 PM

Actually there is a case for slight downward adjustment in my forecast due to the fact that middle east produced 2.5m NPAT in 2010 and it won't provide that much this year...

Sauce

21-08-2010, 09:12 PM

ajs

22-08-2010, 11:49 AM

And one could argue that there is further downside risk if things get even worse in the US... I would say that is indeed the greatest threat to EPS growth this year. Hard to quantify but I'm willing to bet that the lag effect of the GFC will mean that the 09/10 year revenue will fully reflect the situation in the US and revenue will be flat from here on...

I would agree Sauce at least in the next 12 months.

Here's a quote I have written down at home just to keep me focused.

"The biggest mistake investors are prone to make on a recurring basis is forgetting about the opposition"

The North American operation being down on revs doesn't concern me to much so long as it's just general bussiness conditions and not a loss of work to someone else.
This is the stuff as a shareholder thats hard to find out.

This also is why I enjoy this site as it's been a great provider of info.

Regards
Ajs

Sauce

22-08-2010, 07:10 PM

I would agree Sauce at least in the next 12 months.

Here's a quote I have written down at home just to keep me focused.

"The biggest mistake investors are prone to make on a recurring basis is forgetting about the opposition"

The North American operation being down on revs doesn't concern me to much so long as it's just general bussiness conditions and not a loss of work to someone else.
This is the stuff as a shareholder thats hard to find out.

This also is why I enjoy this site as it's been a great provider of info.

Regards
Ajs

Hi AJS

As per Austins comments in their presentation material - the major OEMs are delivering trucks to everywhere but the US! The mining activity and demand for their products has simply dropped considerably with the GFC - which is not really suprising considering whats going on in the US right now!

So, my guess is that competition is not the problem over there, thankfully, and we know that the competitive advantages of the Westech designs will put them in a good position when things improve.

Yes the site is great. You seem to be a numbers guy and your biggest holding is RYM.. Have you tried to reconcile their cashflows from their GAAP to IFRS change in 2007? its driving me insane that I can't figure a few things out.

Regards,
Sauce..

ajs

22-08-2010, 10:19 PM

I'm a little bit reluctant to comment because I don't feel I have the same depth of understanding in this area as You have.

I've been following Your "owner earnings thread" with interest but I must admit to getting lost with some of it.

Could I pose a question for you Sauce?
How different do You view Ang as opposed to Fge from an investing point of view?
Ang has in My oppinion a durable competitive advantage with a monopoly of scale and geography, and is the best in the world at what it does.
Fge has a bright future but it's advantage over the opposition is more dubious and it's a pure play contractor with nil almost, recurring revs!.
What sort of weighting between the two do you think is appropriate in Your professional oppinion!!

Looking at this of course from a long term FA investing point of view.

Appreciate Your time.

Regards
Ajs

Sauce

22-08-2010, 11:14 PM

I'm a little bit reluctant to comment because I don't feel I have the same depth of understanding in this area as You have.

I'm learning a lot about what I don't know and understanding less about what I do :) Perhaps if you got stuck in we could both be confused. lol.

Could I pose a question for you Sauce?
How different do You view Ang as opposed to Fge from an investing point of view?
Ang has in My oppinion a durable competitive advantage with a monopoly of scale and geography, and is the best in the world at what it does.
Fge has a bright future but it's advantage over the opposition is more dubious and it's a pure play contractor with nil almost, recurring revs!.
What sort of weighting between the two do you think is appropriate in Your professional oppinion!!

Looking at this of course from a long term FA investing point of view.

Appreciate Your time.

Regards

Well I think you have hit the nail on the head. I own FGE because its under-valued. I own ANG because of its economics. However ANG is not perfect by a long way - its very capital intensive and grows predominantly through acquisition. I doubt The Sage would have bought it in his earlier days.

FGE has no debt, plenty of cash, and doesn't need the heavy capex that ANG needs to produce cashflow. However FGE has execution risks as it must take on larger and larger projects to scale up and keep returns on equity high.

I feel I understand ANG a lot better than I understand FGE but it could be argued that FGE has a larger margin of safety.

As for a weighting... I think its a personal preference really. ANG is such a huge portion of my portfolio. I have owned it since it was 52c and never sold a share. So I am heavily weighted towards ANG. But that doesn't mean that I think ANG will outperform FGE or that its a better share to own. I simply don't believe in "rebalancing" my portfolio when a good business rises in value.

I hope that helps.

Sauce

22-08-2010, 11:17 PM

Heres another way to look at it:

If I was investing in both stocks today I might well buy equal amounts.

modandm

06-09-2010, 01:04 PM

ANG doing great today, i dont believe in tch analysis but youcould say they broke out of a acending triangle on friday and jumped up then up another 7c today despite being ex div 7.5c... effectively gone from 3.60 to $4.00 in two days.

More great results for shareholders - this stock really is a darling - and deserves to be at a pe premium to its peers - consistent outperformance! Happy days and congrats to fellow shareholders

Sauce

06-09-2010, 01:29 PM

Exuberant market right now thats for sure..

Sauce

06-09-2010, 01:32 PM

You've just reminded me that ANG were supposed to have been closing on multiple acquisitions by now. No word yet.

Sauce

17-09-2010, 06:38 PM

Some aggressive buying from someone today. Several times today they soaked up entire sell side.

COLIN

18-09-2010, 09:39 AM

Some aggressive buying from someone today. Several times today they soaked up entire sell side.

Yes, surprised me, can't be BKN because of their being at the 20% ceiling.
Glad I jumped back in.

Cheers, Sauce.

Sauce

18-09-2010, 02:56 PM

Yes, surprised me, can't be BKN because of their being at the 20% ceiling.
Glad I jumped back in.

Cheers, Sauce.

Nope not BKN. Glad your making some paper profits there Colin. Closing in on my first 10 bagger with ANG. At least on the first tranche I purchased rather than my average entry.

Regards,

Sauce

h2so4

20-09-2010, 07:51 AM

Nope not BKN. Glad your making some paper profits there Colin. Closing in on my first 10 bagger with ANG. At least on the first tranche I purchased rather than my average entry.

Regards,

Sauce

Outstanding dude.:)

COLIN

21-10-2010, 11:09 PM

Sauce

22-10-2010, 10:48 AM

Trading Halt. What's your guess, Sauce? My first reaction was naturally that it might be Bradken taking it all out, but the wording doesn't seem to hint at that; "a corporate transaction" could mean anything.

Hi Colin
It will be an acquisition, most likely of just one business while updating us on their other acquisition plans. They have flagged several they are running the ruler over.
Could be either South America or Australia, I think most likely Australia with an update on South American plans.
Cheers
P.s. I am not a believer in an imminent Bradken takeover.

COLIN

22-10-2010, 12:30 PM

Hi Colin
It will be an acquisition, most likely of just one business while updating us on their other acquisition plans. They have flagged several they are running the ruler over.
Could be either South America or Australia, I think most likely Australia with an update on South American plans.
Cheers
P.s. I am not a believer in an imminent Bradken takeover.

Well, the announcement is out but unfortunately its not exactly a momentous event. But at least this acquisition is "immediately EPS accretive" so thats something to be thankful for.

Sauce

22-10-2010, 12:48 PM

Hi Colin,

Business as usual for Austin as their chosen expansion route is to buy these bolt on businesses and then expand facilities and introduce their own product ranges. The hunter valley location and competitive advantage of also having local repair services are both significant in Austin's strategy.

They have two more likely acquisitions in the pipeline from memory. An international mining parts company, as well as another South American business. I thought they might mention some progress on these but no word.

Colin, regarding momentous events, I think the best strategy here is just to sit back and let Austin compound their free cash generation each year; the shareprice will take care of itself without a takeover. That being said, It would pay to keep an eye on Austin's appetite for debt over the next couple of years.

Their are a few key drivers but a big thing to watch is the revenue generated from Chile once the new 8m workshop is finished. This is due to complete late this year/early next year and of course we won't see the revenue on the books until some time after that.

Regards,

Sauce

modandm

23-10-2010, 11:40 AM

hey sauce - if you don't mind me asking what investments have you got on the radar and recently bought or looking to buy into? I have been having a hard time buying in the last month as after the last few months I can't find anything as cheap as things have been and don't want to overpay. I really missed the boat on IMD which is one I have been eying up for a year. I can't complain too much as my GINHA and AFPHA has done pretty well over the course of the last few months and of course ANG :)

Anyway im sitting on a little cash and would love your ideas to go and have a further look into myself - always admire your analysis. cheers

Sauce

23-10-2010, 04:17 PM

hey sauce - if you don't mind me asking what investments have you got on the radar and recently bought or looking to buy into?

Thanks modandm,

I have been accumulating RYM for the last two months after doing more in depth research than I have done on any other company, including talking to employees, customers and the CFO.

I believe its currently undervalued by about 24% which is about the minimum margin of safety I would want, however the quality of this business is simply unparalleled on the NZX. They have the most ethical management, they are the most well run and well respected within their industry, and the business has very high rates of return on capital and incredible cashflow, gearing less than 10%. They are also a bit out of favour due to the markets belief that their fortunes are pegged to the property market, which is not accurate. And they are not a sexy, exciting stock to follow; all the more reason to like them in my opinion.

And of course they are surfing a "giant tidal wave" of increasing demand from the aging population over the next decade, with very little in the way of competition. And they have a very large moat created by their vertically integrated model which allows them to be low cost providers while also providing the best quality service, evidenced by a superior reputation in the marketplace.

As an aside, Return On Invested Capital is a better measure of the economic returns to shareholders, rather than Return On Equity, as the reported equity includes asset re-valuations. Their ROIC has averaged 30% since they listed in 1999. Consider this if you run any numbers.

Much discussion has taken place on the "owner earnings vs free cash flow" thread on the NZX part of Sharetrader. I have had my fill now, average entry 2.04. In fact I really backed up the truck on this one as I am so certain of their prospects.

Half year results in NOV ought to show them running at a smidge over 15% growth in cash profits, I anticipate a slow re-rating before, on or after this result.

Love to hear your thoughts Modandm :)

Cheers

Sauce

Sauce

23-10-2010, 04:26 PM

I can't find anything as cheap as things have been and don't want to overpay. I really missed the boat on IMD which is one I have been eying up for a year. :)

It's better to wait than overpay, sounds like your making the right decisions to me. If you already have good exposure to fast growing mining services companies, perhaps missing IMD not a bad thing. I am not a fan of over-diversification, but I think a few eggs are a good idea if you can get across the business model of each.

Sauce

25-10-2010, 06:33 PM

It makes me a bit sick in my stomach when I see another round of options that represents close to 1% of the company being dished out to the managing director - Shareholders haven't even voted on it and they are already in the money.

He is already being paid close to a million dollars including bonuses and he owns 5pc of the company; there is no need for short term incentives related to share price. Why not raise his bonus based on certain profit based incentives ? Continually diluting shareholders further is simply corporate backslapping in my opinion.

Compare this with RYM who have only a couple of people earning over 200k and the MD is about 500k. And there are no options and no shareholder dilution. And its a billion dollar company.

As much as I admire Austin's success and I am great full for the wealth it has created for me so far, I won't be voting in Buckland's favour, but unfortunately I suspect I will be in the minority.

Regards,

Sauce

COLIN

26-10-2010, 12:09 AM

modandm

26-10-2010, 04:21 PM

thanks for you idea RYM Sauce - Have read the annual report dilligiently and some broker research - seems an excellent company and as you say good management. When investing I often use qualitative factors to push me over the line after examining the numbers - not as thoroughly as you I might add but then again I can't justify more than 5-10 hours of research on any investment due to the size of my investments. In any case I will be looking for an opportunity to add some RYM, I have had a small amount for awhile.

Living in Australia now I feel that investing for the commodity led growth really is a focus. As such I feel mining services and large to mid cap miners are great investments. I avoid explorers as I feel that unless you are a geologist it is mostly gambling. I wouldn't call myself overconcentrated in this sector just yet as ANG is not as big a part of my portfolio as it is of yours (unfortunatly for me). I also have been dabbling in income securities with some good success, they are more interesting than alot would think and returns in an increasing interest rate environment (floating rate debt) has been better than I could have hoped.

Have you any view on SWK - Swick Mining Services? This is another IMD but maybe 3 months behind - ie hasn't picked up after the GFC yet.

Re ANG - good results but I am getting more and more uncomfortable with the P/E ratio outgrowing the growth forecasts - I am beginning to think there is a bit too much optimisim in this one - is anyone considering reducing their holding? Have to admit I did at $3.60 in April which looked a good move until September.

Sauce

26-10-2010, 07:05 PM

thanks for you idea RYM
Re ANG - good results but I am getting more and more uncomfortable with the P/E ratio outgrowing the growth forecasts - I am beginning to think there is a bit too much optimisim in this one - is anyone considering reducing their holding? Have to admit I did at $3.60 in April which looked a good move until September.

I wouldn't sell just yet modandm. I don't use PE ratio's in my analysis. While ANG is now well beyond my valuation on historical figures, it's not yet beyond my value on FY11 figures.

ANGs intrinsic value is rising fast, they are growing very rapidly. If managements expectations of South American revenue equaling or exceeding Australian revenue within the next few years is what pans out, $4.50 will seem cheap.

If you want to exit this stock, I would say at least wait for the full effects of South American expansion flows through to earnings, although some of this is factored in now.

And then their is Indonesian workshop being built plus further acquisitions and expansion within Australia.

With regards,

Sauce

Sauce

26-10-2010, 08:52 PM

Have you any view on SWK - Swick Mining Services? This is another IMD but maybe 3 months behind - ie hasn't picked up after the GFC yet.

Regarding SWK:

I remember having a quick peek at this, but couldn't remember the details, so I just had another quick peek. I haven't opened the books to reconcile these figures with actual reporting, but I don't like what I see on the summary sheet I have here:

Ignoring reported profits and looking at free cash flow, it appears they had net cash outflows totalling -116m over the last 4 years. I don't know what they have been spending money on, but they have been spending a hell of a lot more than they have been making.

Where is the money coming from? Shares on issue have doubled since listing (99m in 2007, 203m in 2010). So I am guessing it's coming from shareholders and investors.

This might not be so bad as long as they can earn high returns on this all the cash they are sticking their hands out for. Unfortunately that doesn't appear to be the case, with negative return on equity last year, barely better than a bank account in 2009, and only 15% in better times.

I can see several other red flags here but this is already enough to put me off. That's not to say that there is no value in SWK at all, they could take off tomorrow for all I know, but I like more obvious value.

I hope this helps,

Regards,

Sauce

Sauce

26-10-2010, 09:29 PM

A better way to put it; I like more obvious quality before making the effort to determine value.

but then again I can't justify more than 5-10 hours of research on any investment due to the size of my investments.

If this is because you have a very extensive and diverse portfolio, I would argue that you might be taking on more risk than you realise. As you wisely point out, researching businesses is laborious and time consuming. In fact I get shivers just thinking about the reality of what it takes to make a serious attempt to get across a new business.

And then maintaining value estimates for a bunch of businesses and tracking their every move, and that of their competitors, is a large job. I simply cannot find the time to do that effectively for more than about 5 or 6 businesses. Although I might be a bad example as I work 6 days a week.

My personal opinion is that your portfolio should ONLY consist of the maximum number of businesses you feel you can truly understand, and follow with the vigor of a true business owner, even if that's only two or three companies.

For me this is 3 - 5 stocks, but I am busy, for others it might be 10, but I would question anyone who thinks they can truly understand 20 or more businesses and it not be their full time profession. The upshot of this is, if you get it right, your returns can also shoot the lights out with such a concentrated portfolio, and the odds of it doing so is much greater because of the extra time, research and knowledge you will have of each business will actually reduce your risk.

By diversifying you are spreading your time to thin and attempting to get across to many things. This invariably leads to mistakes which drags your whole portfolio down.

Of course I might have got lucky with my concentrated approach so far. My lady seems to think I am a monkey, perhaps I am just throwing darts at the stock list ;)

modandm

27-10-2010, 12:59 PM

My personal opinion is that your portfolio should ONLY consist of the maximum number of businesses you feel you can truly understand, and follow with the vigor of a true business owner, even if that's only two or three companies.

Spoken like a true Warren Buffet Sauce. You certainly have a unconventional investment philosophy!

Being a reasonably recent (not that recent) graduate of University and the CFA program (all 3 levels finally complete :)) I think my philosophy fits somewhere between yours and the efficient market believers. I don't believe in 10 hours or less I can do better analysis than a full time analyst - however I like to think that I have the knowledge to digest analyst research and take a critical view of their analysis - often based on qualitative factors or disagreement on key assumptions such as growth. I guess it also depends on whether the stock is BHP or a small cap that isn't well researched such as ANG.

One thing I might say is that even if you follow 6 stocks closely there is no harm (in theory in the long run:cool:) having further exposure to the market provided it is reasonably diversified. Ie following a core and satellite approach. Using an enhanced indexing approach as your core equity exposure can be great, studies have shown that enhanced indexing yields the highest information ratio (active return/active risk), and once this investment is in place you can then work on generating your own alpha through individual investment selection in your satellite investments.

I definatly believe that having more investments lowers risk not increases it as it is mathmatically sound but I certainly understand and respect your viewpoint and applaud your application.

Thank you for your view on SWK - I really must start applying myself more to conducting some level of detailed analysis - may I ask how you go about it? Do you use excel and transcribe the financial statements to do modelling or do you look at key elements such as cashflow and ROIC over time?

mark100

27-10-2010, 01:05 PM

modandm, having previously worked as an analyst myself I am astounded that as a CFA graduate you are asking how to go about analysing a company

modandm

27-10-2010, 01:54 PM

modandm, having previously worked as an analyst myself I am astounded that as a CFA graduate you are asking how to go about analysing a company

haha, I was always more interested in the portfolio management side, than the financial statment analysis side. Level 2 was a real struggle but I loved Level 3.

I am more asking how Sauce goes about it. The CFA way is very detailed very involved and very time consuming, I am capable of it, however I have never tried to apply the theory in practice - at least beyond straightfoward ratio analysis.

I guess when my career calls for it and tools and tips from experienced analysts such as yourself are available I would have a better chance of actually doing some modelling but in my private time without resources I find the prospect daunting.

May I ask why you are no longer an analyst?

Sauce

27-10-2010, 01:59 PM

Seems a fair question to me Mark100 me since their is a fair amount of subjectivity in the answer. Especially since I have never done any formal study.

mark100

27-10-2010, 02:11 PM

May I ask why you are no longer an analyst?

Because I love finding stocks and buying and selling them! As an analyst you can't do that. You just have to - speak to company, model, write report, collect paycheck. Repeat cycle again. It's very restrictive. Also if you find what you think is a good stock you can rarely just write a quick note saying buy etc. There is usually an extensive due dilligence process, meet the company at least twice, then the question is asked - will we earn any corporate finance fees from them in the future etc? By the time all this has happened the stock price may have moved up and you end up initiating with a hold etc
I also no longer live in a city, worked in London and an Australian city but now prefer living in a smaller town investing in shares with a bit of property development on the side

Sauce

27-10-2010, 03:10 PM

may I ask how you go about it? Do you use excel and transcribe the financial statements to do modelling or do you look at key elements such as cashflow and ROIC over time?

It depends on how indepth I am looking at the business.

To do what I just did for SWK (a 2 minute glance) I simply use a one page summary sheet provided by my online broker which gives me with historical financials and some basic ratios. The first thing I look at is the capital structure, then I look at operating cashflow, capital spending and free cashflow. Then I look at book value and shares on issue, and finally return on assets and return on equity.

I want to see exceptional returns on capital, have little or no debt and ideally growth through reinvestment of existing cashflows rather than capital raisings.

This is often enough to know if the business is worth investigating further (especially as I am not interested in finding Graham's "Cigar Butt" investments). However this "glance"' is really just a basic screen that cannot be relied upon. For instance RYM is a good example where you could go straight past it based upon the ROE figures being low, when in actual fact their return on shareholders capital is consistently exceptional.

If I am searching and screening I use a spreadsheet I have that has all the ASX companies and allows me to filter by industry. I then screen businesses in chosen industry for the characteristics above.

Once I have found something that requires more research, I usually do a lot of the quantitative work first, especially if there is a long track record to work off, because the numbers can provide a clue to see if the business has franchise qualities, durable competitive advantages. I always get financial information from the Annual reports when taking a serious look. This includes running down the balance sheet to see if the asset values are reasonable (and making adjustements if necessary). Next is cashflow and return on shareholders capital. The key to detemining likelyhood of a "moat" is stable, consistent returns well in excess of the cost of capital (longer record the better). Then looking at current earnings power and how much of a premium (or not) the market is placing on future growth.

If all this looks good, then I start the process that I find most difficult and esoteric; trying to determine if the business has true competitive advantages, what those are and how they might change in the future. Are the high rates of return going to be eroded by competition or are they maintainable and why. I am getting more courage to speak to management about these issues and this has been useful. I believe this is probably the most critical and most difficult part of the process to master for long term investors. With RYM I also spoke to employees and many of their customers but I was in the luxurious position of my Job crossing their paths - I am considering trying to incorporate simply cold calling for other businesses as it was incredibly useful.

To assess the companies management, I read every single annual report going back to listing (I literally print them all out and bind them, and read them at night - sometimes has added benefit of sending me to sleep!) and I look at the way management handle earnings expectations, forecasts, and general statements. I look at their remuneration and dilutionary activities. Generally I am looking for people who deliver on promises, don't set unrealistic expectations, and who treat shareholders fairly.

Finally, I will run several valuations. I do a basic DCF (dividends or free cashflow depending on growth stability and payout ratios etc). I also use two straight line formula's based upon Bruce Greenwald's work, and Roger Montgomery's.

I then compare all three valuations to the current price, do a bit of sensitivity analysis etc. If the company has outstanding management, high returns on incremental equity, strong compeititve advantages, and a comfortable capital structure, and is trading at a minimum of 25% but preferably 30-50% below realistic valuation, then I will back up the truck.

From there its maintenance research - i.e. keeping an eye on it like a hawke. Once I have bought I try to ignore share price changes and concentrate on business updates and how they might change my valuation.

More of an art than a science I think - The more I learn, the more I realise what I don't know - business is a mind bogglingly enormous subject.

I hope this is interesting Modamnd. I am enjoying your posts.

With regards,

Sauce

Grundfos

29-10-2010, 09:03 AM

Sauce

29-10-2010, 10:56 AM

Thought I might come in here with a first post to thank Sauce for his efforts. Often makes me wish all online discussion of stocks was conducted at his level to be honest. Never bitchy or petty, always forging ahead in improving his skills and knowledge whilst retaining a self-deprecating manner.

Specific congrats for your ANG success Sauce and for contributing in a small way to my own conviction for it. Looking forward to Huntleys at some point needing to re-initiate coverage by saying "our 'exit above $1.05' analyst was fired, and died on his way back to his home planet", but sheer embarrassment will probably put this off for a while yet. ;)

Wow thanks Grundfos, thats a very nice thing to say and much appreciated, I am honored to be part of your first post.

Yes, that was an incredibly good example of the "value" of analysts research (no offense intended Mark100 or modanmd, speaking generally of course, fully respect both of your independent analysis on Sharetrader of course!).

The funniest thing about that huntleys research was how they had the BUY on it at the peak of the market, and then the SELL at the absolute bottom, and then when the stock started rising again they simply discontinued coverage!

It did piss me off a bit, because although I was buying ANG throughout the GFC, when the stock hit its absolute low and Huntley's released that report, it gave me a hint of doubt that kept my finger off the trigger while the stock was at 80-90c. Luckily I got over that quickly and started buying again but by that time it was back over $1.

The ironic thing was that about the same time, the company was announcing a 30% increase in profits and explaining that their share price would recover strongly when markets recovered. You have to wonder what kind of analysis the huntley's people were actually doing. They certainly were not talking to the company.

With regards,

Sauce

COLIN

31-10-2010, 03:57 PM

I have just deleted an earlier post of mine, wherein I referred to the resignation of the Clough Chairman. Clough, of course, holds shares in FGE, not ANG, and I must have confused some of you holders of ANG. My humble apologies.

FGE, like ANG, continues its strong march forwards and again I thank Sauce for introducing me to that one as well. And Grundfos, I heartily endorse your praise of Sauce and his conscientious research and analysis of ANG.

Some of you who are interested in ANG might also be attracted to MYE. It is a recently-listed and much smaller engineering services company, involved principally with underground coal mining, but it has enjoyed a similar pace of share price growth to ANG. (See separate thread for additional comment.)

Sauce

11-11-2010, 04:32 PM

Austin Engineering confirms Colombia move
Staff reporter, 10 November 2010

PERTH stockbroker Argonaut Securities likes Austin Engineering’s move into Colombia’s expanding mining sector, saying this week a planned new facility in the country’s north was another positive step towards its goal of generating significant earnings from its South American operations.

Confirmation from ASX-listed Austin of the expansion into Colombia follows its earlier acquisition of a steel mine truck dump-body manufacturer in Chile and forging of a manufacturing joint venture in Brazil. The company said it would construct a new facility in Baranquilla in northern Colombia, at a cost of about $US4 million, with completion scheduled for June 2011.

“The mining industry in Colombia is expected to grow strongly,” Argonaut said.

“There is minimal local manufacturing capability for [Austin Engineering’s] range of products.”

This also includes mining equipment wear components and other machine parts. The company has dump body manufacturing capacity in the USA and Chile, and has its main operations in Queensland, Australia.

“Austin’s stated aim is to grow South American earnings to at least match Australian earnings. The expansion into Colombia is another positive step toward that goal,” Argonaut said.

“We anticipate strong growth in revenue in the coming years as we assume Pilbara Hire, acquired in July 2010, contributes to Australia (west coast) revenue in FY11 [we expect $A20-25 million annual revenue]; Phillips Engineering, acquired October 2010, contributes to Australia (east coast) revenue in FY11 and FY12 [about $10 million annual revenue]; and the La Negra and Calama (Chile) and Baranquilla (Colombia) facilities ramp up their contributions over the next few years (note that we equity account for the Brazilian JV).”

Indonesia is also expected to contribute to revenue from FY12.

“We have upped expected margins in FY12 and beyond due primarily to the increasing contribution from South America and Indonesia. By FY13 we expect close on 40% of EBIT to be earned outside of Australia and North America,” Argonaut said.

“We are attracted to the growth potential in South America, as well as in other regions, and believe Austin warrants trading on a higher multiple than similar-sized peers.”

The company had a market capitalisation this week of about $A340 million.

Grundfos

11-11-2010, 06:06 PM

Sauce

11-11-2010, 06:27 PM

A persistent robotic sell-down on ANG this afternoon, FGE in contrast nearly pushing through $5.

Ever run any serious calculations re: the AUD/USD effect on ANG's earnings Sauce? Any alternative theories?

I don't worry about short term fluctuations in the share price of either FGE or ANG. However I do have ANG trading slightly ahead of my best guess at current value (which $4.40ish) - so there is not so much in the way of a discount presenting itself - although I am almost certain that the intrinsic value will be well over $7 by FY12, and the way we are going the share price might get there even sooner.

FGE on the other hand looks cheaper, and is growing even faster, but with more risk. But in saying that, I think I have a better understanding of ANG, I like their business model and I really can't see much in the way of threats or serious risks to their competitive position - so basically I think its a much surer long term bet.

FGE have, in my opinion, more operational and market risk - for starters simply executing much larger projects (which they must continually do to keep compounding their cashflows at this rate) is risky. Competitively their results and return on capital perhaps speak for themselves, but the market is absolutely humming for their services, and I don't really understand at what point this might change or when a slowdown in demand might happen. But I suspect it will happen eventually, even if its 5 years, 10 years of 20 years away.. who knows.

Short term though, who knows what makes people buy and sell, so many varying reasons that I think perhaps reading into daily drops and rises is probably not going to yield anything useful (unless your a TA guru I guess).
Cheers
Sauce

Grundfos

11-11-2010, 07:15 PM

Sauce

11-11-2010, 08:33 PM

Thanks Sauce, becoming too conscious of the 'selling is the hardest part' mantra here most likely. Pleased that by the sound of things your being slightly peeved with management leaves ANG short of 'hold forever' status but not a major concern either.

Hi Grundfos

I think your right, knowing when to sell is probably hardest; within all the established names in value investing advice on when to sell is fairly limited and quite varied.

For what it's worth (probably not much) here's my take on when to sell as a value based investor:

1. When the share has reached or is above your estimation of intrinsic value AND the intrinsic value itself is not likely to keep rising fast enough that you will still make returns you are happy with by continuing to hold

OR

2. You have found an investment you are convinced will provide a better return on your capital

OR

3. The competitive position/economics of the business has changed permanently (this is really the same as 1. The intrinsic value by definition will be dropping)

OR

4. You wish, or need, to consume the proceeds.

The key is really number 1. and 3. of course - and easier said than done. But basically if you keep a VERY close eye on the companies net cash flows, the intangibles on the balance sheet, and the return on equity - in theory you should be able to spot trouble even if the company doesn't make it immediately known. I can't say I have personally been able to actually do this yet, but I am excited about the possibility of one day being knowledgeable enough to do so.

Growing intangibles, a trend of lower returns on equity, negative cashflow, dilutionary capital raisings; Some of these puppies in combination is the big red flag you want to say leave it to someone else to find out whats going to happen from here.

Of course you have to be careful - for instance ANG has seen lower net cashflow due to increased working capital requirements, plus a dilutionary capital raising and an acquisition that was almost entirely goodwill on the balance sheet, and return on equity dropped from 40% to about 22% in FY10 partially because of all this. Yet a good understanding of the business opportunities they are taking advantage of is needed to see through this. The benefits of the expansion and deployment of capital was always going to be realised in FY11 and beyond, and that ROE is about to rocket way back up.

Regarding ANG management; Clearly they are exceptionally good (with what right a layperson in NZ can really claim to have a conviction one way or the other apart from simply liking the success so far ?) but I just wish management were not incentivised with options and they didn't boast of record profits when the diluted returns are actually lower.

But as long as the intrinsic value is rising at a huge rate of knots, these are very very small gripes in my opinion. Combine them with problems with the business though and I would dump the lot much faster than I accumulated them!

Sorry for the ramble got carried away :)

Regards,

Sauce

Sauce

11-11-2010, 11:10 PM

Growing intangibles, a trend of lower returns on equity, negative cashflow, dilutionary capital raisings; Some of these puppies in combination is the big red flag you want to say leave it to someone else to find out whats going to happen from here.

To expand on this... Perhaps the key is to know why these things are occurring, and how permanent any change might be. Unfortunately I would guess that takes insights, although if it was easy then everyone would be rich right? ;)

Regards,

Sauce

COLIN

11-11-2010, 11:11 PM

I don't worry about short term fluctuations in the share price of either FGE or ANG. However I do have ANG trading slightly ahead of my best guess at current value (which $4.40ish) - so there is not so much in the way of a discount presenting itself - although I am almost certain that the intrinsic value will be well over $7 by FY12, and the way we are going the share price might get there even sooner.

FGE on the other hand looks cheaper, and is growing even faster, but with more risk. But in saying that, I think I have a better understanding of ANG, I like their business model and I really can't see much in the way of threats or serious risks to their competitive position - so basically I think its a much surer long term bet.

FGE have, in my opinion, more operational and market risk - for starters simply executing much larger projects (which they must continually do to keep compounding their cashflows at this rate) is risky. Competitively their results and return on capital perhaps speak for themselves, but the market is absolutely humming for their services, and I don't really understand at what point this might change or when a slowdown in demand might happen. But I suspect it will happen eventually, even if its 5 years, 10 years of 20 years away.. who knows.

Short term though, who knows what makes people buy and sell, so many varying reasons that I think perhaps reading into daily drops and rises is probably not going to yield anything useful (unless your a TA guru I guess).
Cheers
Sauce

Greetings, Sauce. Always good to read your measured tones.

I keep expecting FGE to plateau but it just keeps powering ahead. It has gained an unbelievable 1500+% over the last two years. Over the same period ANG is up some 200%, which is very respectable against the market as a whole, but of course it pales by comparison with FGE. Thanks, again, for introducing me to both. They provide a valuable counterweight to the volatility of my more speculative mining stocks.

modandm

28-11-2010, 09:03 PM

Sauce

28-11-2010, 11:06 PM

hi sauce and others,

I have gotten around to conducting some analysis of my own on ANG and I was hoping you might have some comments and be able to explain further how your intrinsic valuation is calculated.

Although its hard without a table I will put some details of what I have.

Rev 11F 187, 12F 225, 13F 270. Growth of 30% then 20% 20%

EBIT 11F 33.7, 12F 39.3, 13F 45.8. EBIT margin from 18% to 17% (closer to LT average)

Eps growth% 32%, 20%, 20%

DPS 10.5, 12.5, 16 - Payout ratio increasing to 40%

Based on this if Austin's PE declines to say 12 after FY13 then the company will be worth about 6.40. Obviously the multiple is pretty sensitive.
:scared:

Hi Modandm

I enjoyed this post very much. So refreshing to see you post your figures and valuation approach. Thank you Modandm.

I like your conservative approach using the lower EBIT margin, and as far as educated guesses to future growth it looks very good. keeping the assumptions over-realistic is best. And judging by the bullish tone of the AGM presentation and all the completed expansion coming online in second half of this FY, and with first full year contribution of all that expansion not until FY12, there is quite possibly considerable upside potential to your FY12 FY13 figures. It looks pretty certain that very good things are going to come to Austin shareholders in the next two years.

Regarding valuation I am not personally as keen on the PE ratio method, but I think your assumption is very reasonable, in fact it's slightly more conservative than the FY12 valuations I have been toying with, which is obviously a good thing.

The three best books that provide information on calculating current and future intrinsic valuations are the following (in my opinion):

Value.Able by Roger Montgomery
The warren Buffett Way by Robert Hagstram
Value Investing by Bruce Greenwald

The first book is probably the best you can find if you want a very good, easy read that provides high quality information and a very quick "recipe" approach to valuation that is actually very rational and easy to do. This is probably the best book I have read for explaining reasonably advanced concepts about what makes a good business in simple, understandable language.

The second book has a pretty decent explanation of performing a discounted cash flow (DCF) valuation, the actual value of which is perhaps debatable but they are fun to do and I think you always learn a lot and think hard about the business and its prospects and what sort of return you expect and require when you do one.

The third book is in my opinion pretty much the bible for any serious investor. It goes into a lot more detail on how to perform both qualitative and quantitative assessment of a business, and perform valuation. More technical but the best information out there. Bruce Greenwald is a very very smart guy. It pays to have at least read Value.Able before this.

If you haven't come accross these books before, I would read them in that order as I think the information provided by each would kind of step up quite nicely that way. Anyone who reads those books can't help but become a better investor for it. Thats simply my opinion of course!

I hope this helps. I look forward to hearing if you have heard of these, have these, or if you get them what you think!

Regards,

Sauce

P.s. Very bullish tone in the AGM presentation. Second half of this year looks to be an absolute doozie. Bring on EPS of 36c + :)

Sauce

28-11-2010, 11:19 PM

Ahh, got carried away with ramble as usual

To actually answer your question, If I post my best guess at a current or future intrinsic value, it's either from a DCF or the straight line approach from value.able.

Interestingly my DCF for RYM came to $2.70 and using Montgomeries recipe spat out $2.67 (once adjustments were made to account for RYMs weird accounting) but due to the extreme sensitivity of the variable inputs that usually doesn't happen.

I am out of town right now so can't access my spreadsheets, but I think I have about $4.40 for Austin as of end of FY10 rising to about $7 in FY12.

Cheers

Sauce

Sauce

29-11-2010, 02:40 AM

The news that ANG are targeting possible Africa and Asia expansion for as as early as 2012 is very significant. Plus expansion to Peru.
Also the 50-60 trays per annum multi-year contract is huge. My understanding is the trays are approx 400k each. Thats an important contract locking in a lot of work.

Phaedrus

09-12-2010, 04:33 PM

Phaedrus, I would love to see what you think of ANG - it appears to have been in a very steep uptrend since the lows of the GFC yet several times it has been heavily sold down on the way up, and during those sell downs I kept wondering how a TA practitioner would have dealt with those drops (that seemed to break all the long term moving averages, and yet the share would continue to appreciate strongly from then onwards).TA is useful for trading any timeframe you want, Sauce. You decide how actively you want to trade and accordingly select indicators and systems appropriate to your aims. Short-term traders may well use the same indicators as long-term investors, but utilising much shorter time periods. Conservative, longterm "buy and hold" investors (Sauce perhaps?) do not want to trade actively and often use a 200 day moving average to keep them on the right side of major trends. This is shown in blue on the chart below. You can see the drops that "seemed to break all the longterm moving averages".... didn't. This commonly used MA kept you in while the uptrend was strong, kept you out over the big downtrend and still has you holding. Of course, conservative indicators are slow to react, so you will be later getting in and later getting out than if you used faster indicators - but this would also mean more trades and you don't want that, right?
The chart also shows conventional trendline-break buy and sell signals. The On Balance Volume indicator at the top of the chart provides additional buy and sell signals. All signals are marked by green and red arrows.
No uptrend lasts forever and even really good uptrends like the current one must be monitored. You need an exit strategy. It is all too easy to give your profits back to the market.
http://i602.photobucket.com/albums/tt102/PhaedrusPB/ANG.gif

modandm

21-12-2010, 07:06 PM

COLIN

21-12-2010, 09:43 PM

Greetings, Sauce. Always good to read your measured tones.

I keep expecting FGE to plateau but it just keeps powering ahead. It has gained an unbelievable 1500+% over the last two years. Over the same period ANG is up some 200%, which is very respectable against the market as a whole, but of course it pales by comparison with FGE. Thanks, again, for introducing me to both. They provide a valuable counterweight to the volatility of my more speculative mining stocks.

Well, ANG has actually performed better than FGE over the past month, but I remain a happy holder of both.

modandm: I endorse your commendation of RQL.

Sauce

22-12-2010, 12:13 AM

merry christmas to holders, another stellar year for ANG.

Sauce - have you had a look at RQL? - Resource Equipment Limited. It's definately in a field im bullish on and has just announced a capital raising to fund growth, I am begginning to have a look at it and am excited at the prospect of picking it up cheaply as the shareprice will probabaly fall to around the capital raising price. Only a $100mcap stock so there may be some room for growth and it's not a demanding P/E (thesedays anyway).

Hi Modandm,

Good to hear from you. Interesting company indeed. I am with you and Colin on that front. - looks like potentially good value too

ROE of 20% soo..

if you were happy with say a 12% return for your risk of being owning publicly traded stock (i.e. your applied discount rate, or required rate of return) then you could value the business based on just its current earnings power at a multiple of about 1.7 x its equity... or in this case about 1.7 x 0.26cps = 0.442cps

This should be fairly intuitive right? For example, a company with a 30% return on equity, paying out all its earnings, would be worth exactly 3 x the equity on its balance sheet for an investor looking for a 10% annual return in cash... Make sense?

But that would be if the company was not growing and was paying its profits to shareholders.. this company is retaining all its profits and is growing and judging by its recent announcements its expecting strong growth going forward - and already locked in four months worth. If they can make 20pc or higher returns on all their retained earnings for a long time into the future, then should be worth at least 0.65cps or about 18% above current price.

If they can make higher returns on equity then it could be worth more.. if they pay dividends out in the future, and or make lower returns on equity it would be worth less..

So clearly need to have a very good feeling for its prospects to value it. Which i dont have. But I am going to do more reasearch as it looks interesting.

Note.. 11m intangibles on the balance sheet..

Required maintenance capital going forward might be the killer...

Thanks very much for the lead Mondandm I am looking forward to reading their annual report tomorrow night!

Merry xmas and happy new year to you and Colin and all of sharetrader. Look forward to more good news from Austin, particularly at full year.

One last thought - Austin are making me wary with these "immediately earnings accretive acquisitions"... I have faith, but return on capital of this latest acquisition is frighteningly low, we are having to rely on the value that Austin can add. I believe they will, but... keep an eye on that ROE and make sure you break down their segments and businesses earnings results as much as possible at half and full year to make sure their return on capital is increasing, not dropping..

Many regards and best wishes

Sauce..:)

Sauce

22-12-2010, 12:21 AM

wooops swap0.26cps for 26cps and 0.442cps for 44.2cps !! big difference, lol

Cheers

Sauce

Sauce

19-01-2011, 11:26 PM

Sauce, I was noticing that ANG has come off a bit, and was thinking about getting back on board.

Still sitting on the fence though, as the Qld floods might cause a bit of a downgrade in their half yearly. A poor half, or a profit warning might allow a cheaper entry. What do you think.

(PS...I realise ANG is getting more and more geographically diversified, but the Qld coalfields must still be a material part of their business) Hi HC

I would choose to go with the advice from the company that things are so far progressing as usual. I have copied recent announcement as follows (you have probably seen this but worth posting I think):

Brisbane, 14 January 2011: Austin Engineering Limited (ASX trading code: ANG) today advises that its Queensland facilities based in Brisbane and Mackay have not been water damaged by the recent floods and rain events, with operations continuing as normal.

The capability and capacity of the Brisbane and three Mackay (Austin Mackay, Austbore and COR Cooling) workshops remain largely unaffected and operations are continuing to progress the existing order book in the normal and ordinary course of business. Any potential impact of the floods is unclear at this stage but Austin remains cautiously optimistic that its Queensland operations and results will not be materially affected by the floods.

Whilst Austin’s Queensland operations are an integral part of the group, earnings are also diversified across its operations in the Hunter Valley, Western Australia, North America, Chile and Oman.

"Cautiously optimistic" is not exactly an all clear of course.

Personally I think the best course of action is to hang an approximate valuation on the business, and then try and pick up the shares when they are trading below your valuation. Short term price movements are so hard to predict I think the odds off making a bet one way or the other (based on current information) is just too uncertain to have a profitable expectation.

However ANG can have some wild swings on no news whatsoever, for instance there was that huge drop to $3.80sh late last year, so perhaps if your patient a good opportunity will arise.

For what its worth (probably not much) I suspect the value (not price) of ANG by 30th of Jun 2011 should be conservatively around $5.15. The main assumption used to reach that conclusion is a sustainable return on equity of about 28% which means they need EPS of 33cps. My estimate of EPS for the full year are about 0.355 - 0.365cps so there is perhaps meaningful upside to the valuation.

If you look at the growth profile and their expansion plans for the foreseeable future, it wouldn't necessarily be a bad thing to pay a fair price rather than a bargain price for ANG.

I hope this helps and I look forward to your thoughts and always respectful opinions HC.

Cheers

P.s. don't forget that the earnings are expected to be weighted to the second half, so even the upcoming HY results won't give us too much to go on, as much as I look forward to dissecting them.

Huang Chung

20-01-2011, 12:27 AM

Thanks kindly Sauce for that comprehensive response. ROE of 28% isn't too shabby.

Sauce

20-01-2011, 04:14 AM

Thanks kindly Sauce for that comprehensive response. ROE of 28% isn't too shabby.

Indeed!

ANGs economic returns have been much higher than that in the past of course. After the Westech acquisition and subsequent Australian expansion their ROE was well over 40%. But it dropped all the way down to 22% almost entirely due to the large injection of equity from the capital raising for South American expansion.

However the returns generated by all that new capital have largely not had a chance to flow through to the bottom line yet. With the considerable production capacity that is about to come on line in South America in the second half of FY11 (not to mention recent leveraged acquisitions) the ROE should head north considerably.

Whatever total ROC/ROE is achieved in FY11, odds are good it will be bettered again in FY12 with a full years contribution from the many new revenue sources. Assuming they don't raise more capital along the way for Asia/Africa expansion.

So when I say sustainable 28% ROE, I just mean that the ROE needs to be at least 28% sustainable for a long period of time for my valuation to be sound. Hopefully they well outperform this as they have in the previous years.

Actually while typing this I ran the ruler over the historical ROE again and I see that you smooth it out over the last seven years (using average of beginning and ending equity for each year) it comes out just a tad over 30% - so I think perhaps using ROE of 28% for valuation purposes is about right regardless if they outperform this over next couple of years. As you still have to account for the lower returns seen in years when capital is raised and expansion undertaken.

When ANG invests capital in new workshops there seems to be an inherent lag in returns. I suspect as they bed down the new facility it takes some time to get it to full capacity. It seems to be in the second year of operation that the full benefits of newly built operations fully reflect in bottom line.

My only gripe with ANG is their heavy use of options and other short term incentives in their remuneration.. In their defense they have a long history of not making forward looking statements and just belting out good returns without any fuss about it.

Anyway they are not alone in their heavy use of options.. frustratingly.

Let me know if you jump on board HC. It's a company with exciting prospects and very good odds of significant wealth creation.

Many regards,

Sauce

P.s. Management still expect South American revenues to equal or exceed Australian revenues in the near future. :)

drillfix

20-01-2011, 04:56 AM

Hi Sauce,

Yep, good stock mate, this is another one on my old watch list that got away, or should I say, I failed to execute to ride on, so I only blame myself.

Has been a nice chart along the way too.

Good luck with this one, but then you probably dont need it with Austin.

Huang Chung

20-01-2011, 08:34 PM

I'll definitely let you know if I jump on board sauce. I'd really like to see the price I pay start with a '3', but that might be wishful thinking.

Sauce

05-02-2011, 03:51 PM

HC

It will be interesting to see if the market is dissapointed by ANGs half year results, or if current price reflects expectations of the full year and beyond, and market won't budge on lacklustre first half earnings.

I have no idea what first half earnings might look like because all the recent acquisitions, might buffer first half EPS, but the more recent company presentations point towards lower (than PCP) workloads across most operations in first half, and record volumes across most operations in second half (aside from North America of course).

So if earnings disappoint initially there could possibly be buying opportunity. Who knows its possible you could get another bite at the cherry. Conversely all the information is out there for all to absorb, so maybe not.

Also its a shame about the delay in new Chile expansion which was due for completion now, but been delayed until May. That would have really turbocharged second half otherwise. It'll mostly be HY12 and beyond that benefits now.

Which means my thoughts on FY10 eps are revised now - I am guessing (very much a guess!) about 33 - 34cps now.

Cheers
Sauce

Huang Chung

05-02-2011, 04:47 PM

Do you know when the results will be released Sauce?

Sauce

05-02-2011, 04:54 PM

Last year it was the 15th

Cheers

Grundfos

09-02-2011, 02:41 AM

Interesting to see a HC poster who attended the AGM in late Nov quote one of the senior mgmt as saying $4.90 was "far too high" and $4.30 (the then current price) was "about right".

"Far too high" got my attention for sheer candour if it's an accurate quote, almost makes you wonder if he'd have actually liked 'Ang' to be wearing a skimpier share price in recent times, tempting 'Brad' into a more impulsive scrip offer. Also worth bearing in mind a lot of the mining services co's have climbed 10%+ (the broader market 6.5%) since it was said, if you're mulling over whether to sell out pre-earnings.

Sauce also gleaned some other good tidbits out of that AGM attendee, if any holders who usually wouldn't go near HC want to seek out those posts in particular. One of them was the mention of them looking for a minimum 30% premium if BKN launched a takeover bid, noting the good fit ANG is to fill the gap left by BKN's expiring ESCO license.

I see in BKN's result though they gave no real hint of an imminent bid for ANG that I could discern, saying they would "focus on managing logistics to ensure continuing G.E.T. supply from July 1, 2011" and that there was a "strategy to offer Bradken's own range of G.E.T. products to the global market".

Grundfos

11-02-2011, 02:47 AM

BKN CEO Brian Hodges on its earnings webcast...

"It's an interesting period we are in now, many of the mining products businesses, there's quite a lot of activity, M&A activity, but I'm finding that some of them are at very high multiples.

Interestingly though there's a lot of organic growth opportunities at the same time, certainly ground-engaging tools is for us a large organic growth opportunity. While it will stay strong in the second half, then our license will finish at the the end of that period, we have this strategy for our own range of products and we expect the global business to ramp up strongly, after a period of getting going and promoting the product in the second half of the year around the world. Australia only forms about 14% of the world market for G.E.T., so there's a significant step-out there, the Chinese foundry capacity will be required within a year or two as we go forward, and we're already under way."

modandm

22-02-2011, 03:31 PM

ANG results preso out

http://www.austineng.com.au/docs/Austin%20Engineering%20-%20HY%202010%20Results%20Presentation.pdf

No surprises, just another steady strong performance. I like the sound of the large multi-year WA Westech contract (40-60 bodys p.a 3 years =~ 18.5m pa rev). Update Contract successfully awarded re announcement 23.2.11

I also like the fact they have some leverage in the business now, its manageable, reasonable, and should enhance returns to equity.

Seems like some delays with the south american rollout (had to be somewhat expected) have been offset by strong performance in Australia.

Sauce - your EPS target of 34cps seems fair, maybe modestly conservative based on the 15cps for the 1/2 and the co historically being stronger in the second half.

Looking forward to hearing your thoughts

Sauce

23-02-2011, 12:34 PM

Hi Modandm

My very rough guess was 11m for the first half and 14m for the second half, so 10.7m was pretty much spot on my very unscientific estimate.

A few points though: The last three acquisitions have bolstered goodwill to the point that 47% of total assets is now accounting thin air. It is now up to Austin to prove that real economic goodwill exists by improving, or at least maintaining, high returns to equity. However as you point out, they now carry more debt, which will artificially boost returns on equity. So it is important to try and keep a close eye on the performance of their new businesses to make sure they are getting a decent return on total capital, not just equity. South America appears to be only providing a 13% return on the purchase price which is arguably at or below ANGs cost of capital. Although it got a bit cloudy this year as they have not provided separation of north & south american contributions. Of course this gave them the entry and access to customers and ability to ramp into current expansion quickly, and by all accounts it looks like this expansion will dramatically improve the returns by 2012, so I think the balance of probability is that Chile will turn out to be the catalyst for value adding growth as is expected.

Words like "control premium" basically means "we know we are paying too much but think we can add value anyway" in my opinion - COR especially will be interesting in this regard.

Aside from all my cynicism, all seems to bode very well. The new contract just announced is great news. I agree it looks very much like my 14m "guess" for second half will turn out to be overly conservative. And 2012 should be exceptional based on new production capabilities in Chile & Indonesia.

One other possibly very positive thing: EBIT margins were down in the 'americas' segment but revenues were up considerably. At first I thought this was a bad thing, but it appears that it may have been largely due to an increase in activity in North America - as Chile seems to be at its production capability limits until La Negra is finished. If North American operations are improving that is great news for Austin.

I hope this helps Modandm

With regards,

Sauce

Grundfos

05-05-2011, 12:17 AM

Sauce, wondering if there are any roughly comparative stocks to ANG that choose to keep tabs on? ESCO if it wasn't privately owned, that sort of thing. All I've got to offer is Komatsu and Caterpillar's quarterlies last week with very strong performance and outlooks for their mining equipment divisions.

Also quite like to see some Goldmans research that said BKN buying the remaining 80% of ANG wouldn't create value and suggests another Almac-style acquisition is likely, if anyone with JBWere(?) research access to a BKN paper from late Feb could share the relevant excerpts from that.

Credit Suisse put out another BKN update last week after their FY guidance was reiterated and new debt facilities announced ("$300mn of balance sheet headroom suggesting a return to acquisitive growth"). Never any mentions of Austin with them and didn't clarify whether they're of the view the $70m in ANG would simply be retained.

Grundfos

06-05-2011, 09:07 PM

We will be able to follow ESCO's movements soon as it turns out -
http://www.bizjournals.com/portland/news/2011/05/02/esco-corp-files-for-175m-ipo.html

Sauce

08-05-2011, 06:40 PM

Hi Grundfos

My view is that ANG is a tad expensive and I doubt BKN would like to try and swallow it at current prices so I guess I agree with Goldmans. I believe the very positive news from the big OEMs is likely to be very positive for ANG. In particular, I have a theory that their north american operations might show some recovery this year.. but that's just a hunch.

More generally I also suspect ANG are going to have a bumper second half. The amount of capital expenditure going on in Austin's markets currently is enormous. However current price has a lot of growth priced in (Approx 17pc annualized for at least 11-12 years by my calculations).

You could argue that ANG is quite overpriced and somewhat exposed if they underperform, especially if you believe China might come off the rails in the medium term.

I sold 30% of my holding at about 4.76 - $4.80 to buy ZGL at 35c. So far so good (the weightings are about equal within just a few weeks, in fact ZGL was ahead for awhile!). I plan to hold the rest for the long term and see what pans out.

I think it pays to keep an eye on what Austin's customers medium term capex plans are and what the commodity markets are likely to do in the long term, as this will play a big part in a cyclical business like Austin's.

Thanks for the Esco link, much appreciated.

Cheers

Sauce

modandm

31-05-2011, 04:14 PM

Brisbane, 31 May 2011: The Directors of Austin Engineering Ltd are pleased to advise that it has signed
a strategically important contract with Xstrata-Peru for the supply of trays for all new trucks over the next
3 years for its Las Bambas and Antapacay mines. The order was won over international competition and
further enhances the Company’s products and abilitities in South America.
Details of the contract are as follows:
• Initial order for 60 trays with Delivery commencing in June 2011 to June 2013.
• Up-front payment of USD 7.8 million.
• Extension to the larger stage 2 (2013-16) should all parties be satisfied over the initial stage 1
period (3 years).
• Talks will commence shortly on a maintenance contract for the trays.
• Talks will also commence on a contract for replacement trays for existing trucks and other
equipment.
• Austin Engineering will have a facility in Arequipa (Peru) to assemble and provide maintenance
services to Xstrata (the trays will be flat-packed from the Chilean facility and assembled in Peru)
• Austrade has assisted Austin in the process of entering the Peruvian market so far, and Austin
will be commissioning them to facilitate the identification of possible acquisition targets (as was
the case in Colombia and Brazil).
Commenting on the contract win, Managing Director Michael Buckland stated, “This contract continues
our belief that South America will form the biggest part of the group’s revenue in years to come and
delivers on our strategy. The contract win and start-up of operations in Peru follows the company’s
strategic plan of having facilities in all the key mining areas of South America. Peru is currently spending
billions on mining projects and this amount is expected to increase over coming years, bringing Peru inline with the larger mining countries such as Brazil and Chile. The awarding of this contract and the facility
in Arequipa will place Austin in an excellent position for the discussions on maintenance, replacement
trays and other equipment which will commence shortly”.

modandm

31-05-2011, 04:24 PM

And the shareprice is up 7% to an all time high.

Sauce - sorry I never got back to you re your email some time ago. I did have a look at it but I guess didn't understand the methodology you use. It is obviously serving you well with ANG, RYM and ZGL all going great. I don't like ZGL much personally but ANG and RYM are great business.

I don't hold you responsible at all but do you remember I mentioned Imdex some time ago...? It has gone from 75c to $2.10... Im very disappointed I failed to act on my convictions with that one.

From the little I understand of your successful methods I do see a weakness in that it requires a steady strong ROE history. Although this identifies businesses that have done well in the past and 'should' continue to do well - one must remember that past performance is not a foolproof indicator of future performance AND some businesses have volatile ROE or may go through a period of low ROE before making good ROE. I guess I prefer a larger investment universe and am happy to invest in a recovery or growth business without such a track record.

Anyway's be great to hear from you again sometime

Sauce

07-06-2011, 05:36 AM

Hi Modandm

Good to hear from you. Sorry for the very late reply, I am on holiday and have been fattening and sunning myself rather than spending time on the net :)

This was a very significant announcement from ANG. It is the first real sign that their convictions about the potential in South America are now coming to fruition. ANG had some fairly large hurdles to leap to ensure their intrinsic value kept rising, because they raised capital at a very inopportune time (near lows of GFC) which diluted ROE and was a very questionable activity, however the potential of their ongoing expansion into South America was very high, and their conviction they could pull it off was very high. The question now is whether their profitability (from an economic perspective, i.e. how much they make versus how much they need to invest) willstart to head north again (I would like to see ROE head back over 30% - its been dropping since highs close to 50% in 2007). I now suspect ROE is indeed rising again, which is very good, and means the current price is all but justified, as expensive as it may seem to some.

ANG really is a rare little gem of a business, at least if you put aside the ever looming threat of a total demand seizure should China stumble.

Regarding your ROE comments: I agree with you that there are often opportunities in businesses that are recovering from a short term problem. However I personally think it might pay to reconsider your comment that you would also look at "growth" businesses without evidence of high returns on equity. The definition of high returns is returns above the cost of capital. If a business is growing fast, but is earning low returns on capital, that growth is actually destroying wealth, not creating it. The faster it grows the faster wealth is destroyed.

Let me provide a quick example. I will use property investment as many people have some hands on experience with it (I apologise, Modandm, if you don't, but hopefully it will make sense anyway).

Lets say I own a rental property that has three bedrooms and returns me $25,000 a year net of all costs (including ongoing maintenance, rates, insurance etc). lets say that I happily purchased the property for $250,000 because, at this ficticious moment in time, 10% net returns are the prevailing market returns for investment property (i.e. what any investor would expect to get). The return is 10% because the annual net cashflow is $25,000. ($25,000 / $250,000 = 0.10 or 10%).

Now lets assume that when I bought the property, I could see there was also potential to build an extension on to the property that would provide a fourth bedroom. I also surmised that the fourth bedroom would increase the annual rental return from $25,000pa to $30,000pa.

Now obviously building the extra room will come at a cost (new equity). But conversely the increased rental return (growth) will increase the overall price of the property because investors will pay more for the extra cashflow.

So how do we know if the expense of adding the extra room is going to be a worthwhile excercise? We need to compare the total build cost with the total capital gain we expect to get from the extra rent. We know investors require a return on their capital of 10% if they are buying an investment property. And we know an extra bedroom will give us $5000 a year in extra rent. Therefore the calculation is simple, $50,000 is the capitalised value of $5000 in annual rent if the required return of other investors is 10% ($5000 / 0.10 = $50,000). So if the build cost is $50,000 it is EQUAL to its cost of capital, and we make absolutely no economic profit. We have put in $1 to make $1. In other words we spent $50,000 to increase the value from $250,000 to $300,000 for a total gain of $0.

However if the build costs only $25,000, then we have created $25,000 in unrealised profit because the property has increased in value by $50,000 but it only cost us $25,000 to achieve this. We have made $2 from every $1 invested. In other words we spent $25,000 to increase the market value from $250,000 to $300,000 for a total gain of $25,000.

Lets assume things dont go to plan, and the build cost blows out to $75,000 by the time the renovation is complete. Now we have created $5,000 of extra annual rent at a cost of $75,000. Because the $5000 in extra rent only gives us an extra $50,000 in market value of the property (because other investors require a 10% return), we have actually just wiped $25,000 off our net worth. So we have destroyed wealth even though we have achieved growth (an increase in profit). In other words we spent $75,000 to increase the market value of the property from $250,000 to $300,000 for a total LOSS of $25,000.

If we look at this last example from an economic perspective heres what happened:

1. We invested $75,000 of new capital in profit growth

2. We achieved our desired growth rate of 20% which sounds good on paper ($5000 of additional annual rent on top of the original $25,000pa = 20% increase in profit)

3. We only got a return on capital of 6.6% ($5000 / $75,000)

4. We started with a property worth $250,000, spent $75,000 and ended up with a property worth $300,000. So we lost $25,000 of equity even though we achieved our growth target.

5. Because our cost of capital was 10% (the prevailing required return for investment properties) and we only made a return of 6.6% we actually DESTROYED wealth, even though we achieved our target of 20% growth and the market value of the property went up.

I hope this ramble makes some sense.

Interestingly the calculation is so simple and intuitive when people are renovating their investment properties they almost never get this wrong (at least they never get the calculation wrong, perhaps the results dont always go so well). But, somewhat astoundingly considering its simplicity and intuitiveness, not many people get this right when analysing businesses.

The reality is that businesses are no different at all. If a company is retaining profits for growth OR raising new capital, it MUST be putting that new equity to work in a way that provides a cashflow return ABOVE what a rational investor would require from that sort of business or it is actually destroying shareholder wealth just like the example above.

If you think that an investor might require a 10% return to buy the cashflow of a business, then any profit that business keeps (i.e. does not pay out as a dividend) OR raises through a capital raising, MUST generate cashflow equal to or greater than 10% of those same new funds being invested in the business. The 10% required return is the Cost of Capital.

How do you test to see if a business is creating or destroying wealth? Simply look at the Return on Equity of the business and compare it to what you believe a suitable return would be. Not rocket science by any means, just common sense.

However you do often (but not always) need to make certain adjustments to the cashflow return and to the equity to make sure its a real reflection of the underlying economics, but thats a different story.

So in summary: be wary of low return on equity or return on capital businesses as they will destroy wealth and in the long run the share price will reflect this. And yes, some excellent businesses will have one or two hard years and that could provide an amazing opportunity to buy cheap. But you have to have absolute conviction that eventually excessive returns will prevail if you want future growth to add real value.

This is not an investing strategy, it is a basic finance principle that is as fundamental to micro economics as gravity is to the laws of physics.

When you suggest that past returns are no indication of the future you are absolutely right. This is where the art breaks away from the science. It is the businesses competitive position within its industry and your understanding of this which will provide insights into the future sustainability of excess returns (i.e. sustainable returns above the cost of capital).

I hope this makes sense and I look forward to hearing your thoughts Modandm.

With regards (from Kalkan, Turkey),

Sauce

Sauce

09-08-2011, 01:14 PM

Austin looking like very good value now. I know everything is. But when you can buy a business on a 10% earnings yield that in turn generates a 25% return on the earnings it retains for growth, you shouldn't look a gift horse in the mouth.

Austin is a better choice than a lot of other businesses because it has very identifiable opportunities to roll out its model, generating returns between 20% - 40% on capital. There are not many businesses that A. generate such high returns and B. have such easily identifiable opportunities to continue to do so.

I am buying today.

Regards,

Sauce

Fodder7

09-08-2011, 02:22 PM

Hi Sauce,

I'd have to agree with you. I sold out of ANG a year ago around $3.60 when management seemed to be turning towards spin (IMO) and EPS had started to slide a bit. It was looking like a big mistake for a long time so I'm happy to have the opportunity to get back in now ANG's prospects are looking pretty good again. I bought a small chunk at 3.25 this morning and hoping to buy more if the SP continues to decline <$3.

I'm curious what are you expecting for the full year and where you see fair value for ANG?

On the other hand, it's difficult to call ANG a screaming bargain when we have stocks like QBE, MQG and CPU trading on such low multiples.... Interesting times...

Cheers,
Fodder

Sauce

09-08-2011, 05:03 PM

Hi Fodder,

I have plugged in a few assumptions to come up with EPS of 33.8cps for the FY - analyst consensus is 33cps so I am slightly ahead. My estimate of fair value is somewhere between 4.40 and 5.10 depending on which point in time you are looking at - closer to 4.40 now, moving closer to 5.10 by the June 2012.

Unfortunately the strong AUD will impact the results somewhat. I have not attempted to quantify to what extent. (If anyone has the time I would love to hear some thoughts on this).

I think I have kept assumptions conservative, but the main one being they will have to be able to maintain a 25% return on incremental equity for the valuation to hold.

How do we quantify the odds of them being able to do this?

Firstly their track record:

Average ROE in 2007 = 34.90%
Average ROE in 2008 = 46.17%
Average ROE in 2009 = 35.61%
Average ROE in 2010 = 22.87%

The reason for the big drop in ROE in 2010 was due to the capital raising that diluted EPS considerably. This was a double edged sword for investors because the capital was raised at a very undervalued price, meaning that some value was destroyed (as evidenced by the drop in ROE). It also means they actually paid more (in value terms) for Conymet Chile than is indicated by the purchase price. However, the logic of it all rests on their ability to extract value from their South American operations that the capital was invested in - ROE should start to rise back up as the benefits of their expansion in South America flow through.

Secondly they have a visible opportunity to replicate their business model at high returns in the future:

They are just now at the beginning stages of repeating what they did in Australia but in South America - which is currently a booming market with billions being spent on mining expansion - and importantly with much less local competition than Australia. Some South American miners have even been importing trays at huge expense. I suspect this gives ANG something of a price maker status considering its trays are now locally manufactured providing better economy. That should ensure the fat margins are sustainable. There is strong evidence of this theory: In 2010 ANGs total net profit margin was a (very respectable) 13.4%, but the Chilean contribution was at a margin of 24%.

Also ANG has stated several times that they can pass raw material costs through to customers. That is a clue that they may have the kind of pricing power that Buffett loves. Pricing power provides a hedge against inflation and a way to increase profits without expending any capital. A low capex business with pricing power should, in theory, perform very well in an inflationary environment.

For their facility expansions and new workshop builds my understanding is they target a 20% (pre-tax) ROC in first year of operation rising to 40% (pre tax) ROC from second year of operation. Those are very attractive returns, unavailable to most businesses.

They are literally consolidating a very fragmented industry, with very localised and weak competition. The have a significant first mover advantage in that they are the first, and I believe still the only, after-market dump tray business to capitalise on a global scale with local manufacturing capabilities.

Another key point about Austin is that their operations require very little ongoing capital to run once they are operational, meaning they have low maintenance capex requirements and therefore strong cashflows.

Finally, the service and maintenance side of their business is incredibly lucrative, with very high returns and limited capital requirements. Not only are these important high return revenue streams, but they also entrench Austins competitive advantage. Austin can offer vertically integrated sales and service, locally, and build high quality relationships that give them a form of customer captivity. This will make it very hard for potential entrants to steal customers.

Austin believe South American operations will overtake Aussie earnings soon, and they are also targeting Asia, Africa etc for expansion as soon as next year.

So, in summary, I believe a 25% return on incremental equity (earnings retained and not paid out as dividends) is sustainable.

I hope that helps,

With regards,

Sauce

P.s. if you look at the return on equity figures for some of those businesses you mentioned you will see that regardless of their PE multiples, it is unlikely they will compound wealth as fast as ANG, with perhaps the exception of CPU. So they may, or may not, be better value.

Sauce

10-08-2011, 09:36 PM

Did you pick any up Fodder?

Cheers
Sauce

Fodder7

15-08-2011, 11:45 AM

Hi Sauce,

Firstly, thanks for your detailed reply. Yes, I did pick some up during Tuesday's lows (~3.25) but not as many as I would have liked since they have bounced strongly. I also picked up some BKN, IMD and DTQ since I'm pretty keen on this sector at the moment.

I struggle to come to terms with how easy Austin seem to make international expansion look, particularly in the ecconomic climate of the last couple years. Their margins are quite spectacular. Hopefully it can continue for several years...

Cheers,
Fodder

Grundfos

15-08-2011, 09:55 PM

A good boost for Austin's Indonesian venture here I think, 5 trillion rupiah = US$585m -
http://www.bloomberg.com/news/2011-08-15/caterpillar-plans-to-invest-5-trillion-rupiah-in-indonesia.html

You see that highgrade.net article back in May Sauce? Interviewed their head of WA operations about high AUD and Aus labour rate not helping, that they'll be paying skilled Indonesian workers ~10% of the Aus rate, red tape-related delays much worse with Batam Island than they encountered in Sth America however, maybe looking to ship from there to Africa, etc.

After their bad bureaucracy experience, maybe that's now the preferred alternative to the "Austin sees Africa as a multi-facility country (sic)" plan they proposed at last year's AGM? Not sure, but probably only a week or two before that's clarified I guess.

Sauce

20-08-2011, 03:49 PM

Hi Grundfos

Sorry missed your post for some reason, late reply. Yes I did read the Highgrade article, it was very interesting.

Regarding shipping to Africa from Indonesia: I am pretty much certain they will roll out local manufacturing facilities in the medium term. In fact offering local manufacturing and service is really at the heart of Austin's global strategy. I believe the economics of flat packing the trays, shipping and then assembling on-site are just not competitive. And if there is a decent margin in shipping them, then it is open to being obliterated by a new entrant who manufactures locally, which is exactly what Austin is doing.

If you read their contract announcement for the recent large Indonesian order, Austin are supplying the first 30 trays at little or no margin before their new local manufacturing facilities are finished. The stated reason being:

"the strategic value of the order to the Company cannot be understated as it will enable Austin to fast-track and showpiece the technical advantages of its products and services to the Indonesian mining market”

Following from that, my guess is that if they ship trays to Africa from Indonesia initially, it will mostly be to secure and build the relationships before setting up local facilities. The opportunity in Africa is also large and growing.

Cheers Grundfos, good to hear from you as always. I bet you are looking forward to the results next week as I am.

Sauce

Grundfos

25-08-2011, 02:46 PM

Sauce

25-08-2011, 03:45 PM

Thanks Sauce, definitely tomorrow is it?

Obviously the OEMs were able to deliver up to 90% y.o.y. revenue growth in Sth America earlier in the year, unfortunately Austin still had its significant capacity issues until April I believe. If the result has a sleeper hit in it, my guess would be appreciably better numbers out of Wyoming, due to what CAT called a basically unavoidable equipment refresh cycle in Nth America, the first one post-GFC. Just a pity those numbers will have received a very unflattering haircut in AUD terms, even if they have improved markedly.

Great points Grundfos. Last year revenues from north america were about half what they were pre-GFC.

I entirely agree with your thoughts. I will be watching the Wyoming results closely - its a pain that they lump it in with South America in the 'Americas' segment. It makes it difficult to separate, but previously it has been possible so hopefully they provide enough data or we will have to contact them about it.

Austin have a lot of expansion that completed towards the end of last company year, and due for completion right now (indonesia was Aug/Sep for instance). Bodes well for superior organic growth for FY12.

I believe they are back to taking pre-payments and deposits on most orders, so the cash flow statement might provide some insights.

Cheers

Sauce

Sauce

25-08-2011, 07:00 PM

Hi Grundfos
Sorry, yes I believe tomorrow is the day.
Cheers

Sauce

26-08-2011, 03:26 PM

Diluted EPS 30.3cps.

Shame about Chilean expansion delays and hunter valley result, along with the currency movements they were the killer to EPS, would have been right on or above expectations otherwise. Four month operating loss from Chile is frustrating. As usual, take construction deadlines and add 40% and you might be close to the mark.

However, turning the glass the other way up: La Negra now fully operational. And as I thought, operating cash flows are telling the story somewhat - with terms back to prepayments and deposits - we get some idea that are looking very good heading into FY12.

While the immediate EPS was a bit disappointing, the result bellies much to be excited about.

Will have a look and post more thoughts once I get away from work. Love to hear others also.

Regards,

Sauce

Grundfos

02-09-2011, 09:14 PM

Like you I saw some better things than the market did initially. Disappointed that Austin were quick to put out an announcement saying they were unaffected by the Qld floods, and yet if there were any holders with some knowledge of the issues in Chile they were given months to sell to unaware buyers in the high 4's and 5's. One of those bitter buyers has in fact questioned me on just how strict a happy-clappy news bias was deliberately taken, until say BKN actually ponied up for Norcast. Should've explicitly told her not to buy in the high 4's.

No mention of the African expansion at all in their outlook was interesting to me, was expected a softening up for it in this update if we're still roughly on the AGM's time frame. Pushing the higher end of the dividend range suggests they probably won't be the biennial capital tapper Montgomery once questioned anyway.

If your more extended breakdown is in the works I look forward to seeing it Sauce, if you couldn't find anything that interesting in the numbers don't feel compelled to do one on my account.

Cheers,
Grundfos

vader

04-09-2011, 04:36 AM

I bought ANG in the high 3's and 4's, still happy with them if you look at the return over last year and i have no doubt they will increase in value over the next year !

Grundfos

08-09-2011, 03:18 PM

Nice little local news story about Westech's Guinness Book of Records dump truck body that was mentioned in the result's media release -

http://www.therepublic.com/view/story/36cb27ca314e420982bbb2b602b5a123/WY--Coal-Hauler/

http://www.therepublic.com/view/photos/36cb27ca314e420982bbb2b602b5a123/110614173281/

Grundfos

24-09-2011, 02:46 AM

Peter Beattie giving Austin presumably its most column inches in a major daily yet -
http://www.theaustralian.com.au/national-affairs/our-superior-manufacturing-skills-will-give-us-the-edge-in-the-world-market/story-fn59niix-1226144281056

Russia and North Asia the next regions for expansion is the news in it for this thread's regulars.

There are already some Australian companies thinking outside the square, applying innovative strategies to take their products to the world and expand their business. One such company is Austin Engineering, which is a useful case study. The key to its success has been quality products backed by reliable delivery.

By manufacturing in Australia and Latin America the company has increased Australian jobs and, through partnerships, expanded into new markets. So what did it do?

In Peru the company signed a contract with Xstrata to make 70 of its new dump trays and it is establishing a Peruvian operation by December to provide maintenance services for Xstrata.

It has a similar operation in Brazil, working with the big Brazilian miner Vale.

In Chile, Austin purchased a steel tray business, Conymet, introduced its key products into that market and built a state-of-the-art manufacturing facility that was completed in July. The Chilean government provided $US1.2 million ($1.1m) in support, but the facility is 100 per cent owned by Austin Engineering.

In the northern Colombian port city of Barranquilla the company purchased land to build a new manufacturing facility by the end of next month, which again will be 100 per cent Austin-owned.

Austin strongly believes Australian companies have technology and skills that are far in advance of other countries, and it has faith in the ability of our companies to be successful overseas, thereby creating income and employment in Australia. Austin is looking at Russia and North Asia as the next regions for expansion.

Before the purchase of Conymet Chile, Austin employed 680 people; now the figure is 1200, and by the end of December the company expects to add another 300 employees. It is an example of an Australian manufacturing company that is successfully competing on the international stage and growing, despite the obvious challenges.

At home, the regional city of Mackay in north Queensland has become a powerful manufacturing centre with its cluster of small to medium-sized businesses that owe their origin to the mining sector; their world-class skills are globally marketable. Projects to the value of $140bn are planned for the Bowen and Surat basins alone and Mackay engineering companies are gearing up, using strategic collaborations through consortiums or joint ventures to win work on these projects during the next two years. These companies will spend an estimated $126m and employ an additional 1230 engineering, technical and trade staff on these contracts.

This quality workmanship and skills, targeted at the right global markets, will produce results. By using our skills to produce quality products the world wants to buy we will be in demand. Price is important, but so is quality and reliability. The cost of a project is not just the construction phase but the life of the whole project.

This is where Australia's new trade policy is helpful, by expanding our trade and diplomatic representation in rapidly expanding markets such as Latin America and Africa.

This brings me to the issue of maintenance. Too often the focus is on the manufacturing work associated with the construction of a project and not enough on the maintenance work. Austin Engineering is moving to capitalise on the importance of maintenance work and is in discussions to purchase a business in Chile to provide on-site service and workshop repairs. It is a lucrative area for our manufacturers, where domestically the location of our companies is a cost asset.

Grundfos

14-11-2011, 05:21 PM

Sauce

14-11-2011, 08:56 PM

Not sure if you're still planning on attending the AGM on the 25th Sauce? Your reduced holding maybe makes it less likely?

A longshot, but if anyone could use their phone to catch a bit of Michael Buckland audio on the 25th and upload it to Youtube. I'm sure the majority of holders not only couldn't pick him out of a line-up but have also never heard him speak.

Hi Grundfos
I'm not going to make it now as I have committed to a sporting event in NZ on the 26th. I would very much like to have attended.
Regards
Sauce

P.s. bought back most of the shares I sold at 3.25 and a few more at 3.80 recently - very nearly back to original holding

modandm

23-02-2012, 11:48 PM

Hi Sauce and others. Im sure you have had a look at the HY preso. What do you think? Im yet to delve into my spreadsheet and calculate some ratios but looking at the surface I am very happy with the result. Particularly Revenue and the comments that as 2nd half revenue will be even stronger in comparison to previous years. Could ANG crack $300m in revenue FY12. That would be amazing. Reduced margin is a bit of a worry and something to watch - I guess its a consequence of growth and trying to secure new business in SA.

Still holding and will continue to do so for a long long time. Lots of steady growth 10-15% to come and on a PE of 12 its not expensive but not cheap either. EV/EBITDA of 4.3 suggests it is cheap. Honestly with the track record now it deserves a premium.

P:S Sauce - you know I'm not a follower of Roger style analysis (I don't know how it works TBH but I also would think the sensitivity of the assumptions makes it less useful that simple DCF and ratio analysis). Anyhow I would still much appreciate your take and what you are coming up with as intrinsic value for ANG. Be great to hear from you and what stocks you are into these days (besides ANG and RYM).

Sauce

25-02-2012, 02:14 PM

Hi Modandm

The reduced operating margins are due mostly to lower capacity utilisation in the first quarter. With Austin commenting that first three months of the half year were slow in Western Australia and North America.

I believe this highlights Austin's operating leverage. A large portion of their costs are fixed operational expenses, so when manufacturing capacity utilization is low, the fixed costs don't reduce so margins compress. But conversely, when they are running at their full productive capacity, and costs are mostly fixed, margins skyrocket. Hence larger, long run orders produce higher margins.

So that is why you should see margins rise considerably in the second half.

Also margins and overall contribution from South America is not even close to its full potential yet. I understand there were some issues moving to the new La Negra facility (absorbed in FY 2011) and, as is often the case, bedding down the South American expansion has been a lot slower than Austin hoped for. In the recent first half they experienced a delay in a large order so the facility was underutilised while it was waiting on the order to be finalised.

All said and done, these hardly unsurprising issues (with greenfield expansion) are one off in nature. There are several good reasons to suggest that the second half will be materially strong:

1. Management have reliably predicted a strong second half in the past and always delivered or over delivered - this time they stated 'more so than others'
2. When they released the recent comments and business update, they are already two months into the second half
3. I believe that the nature of the length and turnover of contracts and tendering is such that the short term results are very predictable for Austin. But the medium/long term is not.
4. Its quite clear from their business update that South America is finally starting to deliver the high revenue contributions and productive capabilities that Austin anticipated.

I think the only concern with Austin would be if the current resource boom ends abruptly and mining expansion in Australia and South America slowed considerably then their operating leverage would work against them, revenues would drop and margins would drop like a stone. I don't invest from a top down perspective, but I think demanding a big margin of safety for a business like Austin is probably wise due to ‘top of cycle’ possibility.

For what its worth (nothing!) my prediction for Austin FY result is the following:

47.7m ebitda minus 8m interest, depreciation and amortization = 39.7m PBT minus 27% tax (typical tax rate for Austin) = NPAT 28m

28m divided by (approx) 74m shares and options = 38cps fully diluted

2012 Return On Equity of approximately 27%

Based on this forecast I personally think Austin is now trading, in rough terms, pretty close to where it should be. But its value should rise considerably in next couple of years. I was a buyer at 3.25, 3.80 and 4.00 but not enough margin of safety now if something goes wrong. If the market for their products stays as it is currently (and by all acounts the mining capex in SA and AUS appear to underpin growth for next few years easily) then I strongly believe they could be worth over $10 within five years.

The only thing I didn't like was the boards decision to report EBITDA instead of EBIT. I can understand that Austins depreciation is rising due to capital investment in new facilities, and I can also understand that Austin is in the lucky position that depreciation may well overstate capital investment required to maintain such facilities (I understand their facilities are simple, robust and last a very long time). But using EBIT is more conservative and probably closer to true economic returns (pre tax/interest).

RYM and ANG still biggest holdings by a long way. Not much else on the radar - watching MCE with great interest - hold an insignificant few, just enough to keep me interested enough to following them. I share Mark100s views and suspect there could be a big opportunity with that company but risk currently too high. Some big question marks over managements disclosure also.

Regards,

Sauce

P.s. The formula behind "rogers tables" in his book is effectively a very simple straight line DCF valuation. Like all models it spits out a precise figure and is very sensitive to inputs. Dangerous indeed. Hence the need for a big margin of safety and the use of a range of values and scenarios. PE ratio is very poor proxy for valuation - but there is no silver bullet for valuation, precise value is impossible to know without a time machine.

Roger does not even give away his formula but basic idea is commonly used by others (well before him); check out following link for discussion on various forms of same formula.

http://sharevalue.posterous.com/

buns

26-02-2012, 03:49 AM

The only thing I didn't like was the boards decision to report EBITDA instead of EBIT. I can understand that Austins depreciation is rising due to capital investment in new facilities, and I can also understand that Austin is in the lucky position that depreciation may well overstate capital investment required to maintain such facilities (I understand their facilities are simple, robust and last a very long time). But using EBIT is more conservative and probably closer to true economic returns (pre tax/interest).

http://sharevalue.posterous.com/

Sauce

I understand why you feel EBIT shows more economic sense as it does provide a rough free cash flow figure in a way. But don’t think just because a company reports EBITDA that they are forgetting the cost of the assets needed to produce that.

When maintaining a company’s performance I’ve always found EBIT is quite difficult (internally) to manage performance with.

Imagine trying to set internal targets on EBIT – depreciation just creates a huge sandpit for managers to manipulate. It also really distorts, and gets in the way of true overheads management and reporting. You really get into a lot of detail with overheads, especially when you attempt to roll out scale, use them for M&A valuation etc etc. D&A just messes up the grouping of overheads or support expenses. So does Bad debts.. It’s also not comparable or the greatest indicator of asset intensity as companies can do all sorts with assets and finance/operating leases (lots of vehicles and IT systems are tied up here).

I could go on, and into detail on the annoyance of managing performance with depreciation internally. Simply put I’ve never take much notice of it; it’s easier to push it out to the side and manage EBITDA along side Capex.

I think you probably find EBITDA reported externally because of that.

You can’t do anything with depreciation except manipulate it whatever way you or the auditors please. You made the real decision 1-50 years ago. The only way to control and monitor the real expense here is at source, or before/when that cash is spent = capex.

Gee things would be easier if a company had to report its 'accounting capex' - but I'm kind of happy they don't as it gives me a leg up on investors who just take D&A or the ones who look at EBITDA and take nothing!

And obviously a lot of the limitations I've mentioned above directly affect the Net assets of a company.

One other thing. Don’t always take low capex intensity as a good thing. That sounds really weird but high capex intensity/asset turnover is good for companies with smart innovative people. High asset turnovers means technologies are changings a lot. That gives the smart companies coming 3rd or or 4th a chance to trump up and change the game (think small Telco’s killing Telstra and Telecom), or gives the companies coming first the ability to continuously strengthen and keep developing the technologies to a state where they determine them (Apple, google).

buns

26-02-2012, 04:16 AM

But using EBIT is more conservative and probably closer to true economic returns (pre tax/interest).

http://sharevalue.posterous.com/

You can argue this one the other way too.

When companies depreciation is low its actually a good indicator there assets are about to roll over and they are actually spending lots of capex, and when depreciation is high those assets are in use and the company is going through a capex free period.

If you do use depreciation as an indicator of assets you need to average it over what you feel is there standard asset lifecycle to get a bit closer to the truth. But very rarely do industries with good rates of return have assets with common life cycles, i.e machinery doesn't change every 8 years etc etc. And when the technology does change a company who is left with the old assets have to immediately accelerate/increase its depreciation. When really they probably spent minimal capex that year, and will probably spend 'that capex' 1-2 years later once they have figured out how to implement that change + get it through all the numerous DFA loops, strategic change approvals blah blah.

Sauce

26-02-2012, 11:06 AM

Hi Buns
Thanks for your detailed posts.
I used to spend a lot of time exploring those sort of points in the past. It is easy to expend a lot of time on precise calculations when rough approximations - with a layer of conservatism - is more than adequate. You will always be wrong, you just want to be on the right side of being wrong.
Sauce

winner69

26-02-2012, 11:45 AM

buns said - It’s also not comparable or the greatest indicator of asset intensity as companies can do all sorts with assets and finance/operating leases (lots of vehicles and IT systems are tied up here).

Re your prference to EBITDA or EBIT and discussions on depreciation etc

You say companies can buy (and then depreciate over time) or lease (and expense over time) assets. Management have a choice ... both have the same economic impact in a certain period .... although timing of cash flows of course are different

EBITDA would include the lease expense but not the depreciation ... EBIT includes both

So wouldn't EBIT be better to use to see how the company is going .... manipulating depreciation seems to be your concern ('proverbial sandpit to paly in') but it is a number that is hard to do much with

buns

26-02-2012, 12:30 PM

Sauce/Winner

What do you take from that large change in WIP?

It dosent bother me to much as it means nothing to the long term dynamics of ANG and its competitive advantage, however I'm thinking there is a fair bit of smoothing in that result through WIP.

modandm

27-02-2012, 11:42 AM

Hi Buns
It is easy to expend a lot of time on precise calculations when rough approximations - with a layer of conservatism - is more than adequate. You will always be wrong, you just want to be on the right side of being wrong.
Sauce

This is one of the best comments on investment analysis I have ever read Sauce.

To add my 2c to the EBITDA EBIT discussion - most analysts start start with EBITDA when calculating free cash flow to the firm FCFF and to equity FCFE. Also the EV/EBITDA multiple is the most used in the investment banking industry when looking at takeover multiples. It makes sense that the headline numbers a company quotes are tailored to the end users - imho anyway.

Another 2 q's for Sauce - any idea why debt is forecast to be up high 50's FY12 then back down to 50 in FY13. This is from a Shaw Stockbroking forecast model I am looking at - but that must be based on guidance. My take is that in order to maintain or enhance the 25% ROE into FY14-15 ANG should modestly increase leverage to around 30% D/D+E from currently low 20%. Is this likely to happen with growth options in Africa, Indonesia etc? Should ANG increase the dividend and borrow more? I get the feeling I already know your answer sauce.

buns

27-02-2012, 03:08 PM

This is one of the best comments on investment analysis I have ever read Sauce.

To add my 2c to the EBITDA EBIT discussion - most analysts start start with EBITDA when calculating free cash flow to the firm FCFF and to equity FCFE. Also the EV/EBITDA multiple is the most used in the investment banking industry when looking at takeover multiples. It makes sense that the headline numbers a company quotes are tailored to the end users - imho anyway.

Another 2 q's for Sauce - any idea why debt is forecast to be up high 50's FY12 then back down to 50 in FY13. This is from a Shaw Stockbroking forecast model I am looking at - but that must be based on guidance. My take is that in order to maintain or enhance the 25% ROE into FY14-15 ANG should modestly increase leverage to around 30% D/D+E from currently low 20%. Is this likely to happen with growth options in Africa, Indonesia etc? Should ANG increase the dividend and borrow more? I get the feeling I already know your answer sauce.

EBITDA or EBIT - I did not intend to pick one over the other, instead just wanted to show that when people talk about EBITDA it doesn’t mean they always forget about their capex intensity as they look at capex out to the side as you would in any FCFF calculation.

However, those investment bankers using EBITA/EV are missing a huge piece of the cake. Thankfully us who know that can take advantage of it.

Increasing a dividend to borrow more? Everyone should know the answer to that one. Let’s hope ANG only lends to fund WIP and other growth opportunities they feel will safely exceed investors required returns.

modandm

27-02-2012, 10:46 PM

However, those investment bankers using EBITA/EV are missing a huge piece of the cake. Thankfully us who know that can take advantage of it.
.

They use that ratio simply as a multiple on which a deal is conducted. By no means is this the only thing they look at and I would argue the LBO or DCF modeling conducted is at a level few if any posters are capable of. But I know that bashing the professionals is popular.

Sauce

01-03-2012, 08:57 AM

To add my 2c to the EBITDA EBIT discussion - most analysts start start with EBITDA when calculating free cash flow to the firm FCFF and to equity FCFE. Also the EV/EBITDA multiple is the most used in the investment banking industry when looking at takeover multiples. It makes sense that the headline numbers a company quotes are tailored to the end users - imho anyway.

From the investors perspective its about whats most rational.

Sauce

01-03-2012, 09:27 AM

Another 2 q's for Sauce - any idea why debt is forecast to be up high 50's FY12 then back down to 50 in FY13. This is from a Shaw Stockbroking forecast model I am looking at - but that must be based on guidance. My take is that in order to maintain or enhance the 25% ROE into FY14-15 ANG should modestly increase leverage to around 30% D/D+E from currently low 20%. Is this likely to happen with growth options in Africa, Indonesia etc? Should ANG increase the dividend and borrow more? I get the feeling I already know your answer sauce.

I presume they are just factoring in ANG paying down some of the debt. No way to know for sure how ANGs gearing will look in 2013.

I believe ANG can probably marginally increase ROE over the next couple of years without increasing their debt. That is because the capital expenditure of South American expansion is largely complete but the cash generation is far from mature.

However that doesn't mean they won't borrow to expand in other countries as you say, or make further acquisitions. I suspect they will. From memory their debt policy is to keep gearing below 50% (a level it has risen to once in the last 6 years) - so there is plenty of room scope for them to increase borrowing if they wish. I would prefer they stay well away from the 50% gearing.

Yes, I think they should keep increasing their dividends and moderately increasing their debt, as their equity and cashflows grow, provided net gearing stays low and interest cover is high. Although from a personal perspective I would prefer they kept all earnings and reinvested it; even their unleveraged returns would be more than satisfactory for my dollars, and I have nothing else I would rather do with the money. But the reality is that there are good reasons for some growth companies to pay dividends, and I know its not realistic to expect them to retain 100% of earnings.

The only real annoyance is when they raise capital in the same year as paying dividends - which is horribly tax inefficient for me personally, especially living in NZ. I used to think this was totally retarded capital management. But I have a different view now.

Cheers

Sauce

vader

02-03-2012, 06:58 AM

Went to the Austin AGM, they stated that the reason they are reporting EBITDA is because of new accounting laws re acquisitions. When making an acquisition you are now required to make a distincion(report from consultants) in goodwill between existing contracts, customer relationships and other. You are required to write off the first 2 over a number of years despite the fact that they may both increase in value over the following years. Making good companies pay for bad ones. You now see most companies reporting adjusted results or before one-offs, especially companies making acquisitions. They say this gives a better idea of how the business is running

Sauce

02-03-2012, 09:25 AM

Thanks for this Vader,

I very much wish I had attended. I have been meaning to go for three years now and every year something comes up. Expect I will make the pilgrimage from NZ this year.

I understand their argument but the irony is they are going from being on the right side of being wrong - under reporting earnings - to being on the wrong side of being wrong - over reporting earnings. This is because they are reporting before D. Its all very well to report figures before non-cash cash charges that may not reflect any kind of true economic cost (like amortization of goodwill), but if you then take out the accounting charge for depreciation as well, even if it overstates economic cost, you are providing figures that do not reflect reality over the long term.

Its the same as a property investor who doesn't calculate his maintenance costs into his yield calculations. Or a homeowner who thinks his yearly outgoings simply amount to his rates & insurance bill - and doesn't factor in that he has to paint the house every 8-10 years, replace the roof every 40 years etc etc.

In my opinion they were on the right track when they stated their guidance in EBITA.

Anyway it doesn't really matter. Apart from the segment results which will be impossible to break down to EBIT once reported as EBITDA, easy enough to work out EBIT for group as a whole. And, unlike some companies, I think Austins NPAT is a fairly good representation of returns.

More importantly; what did you glean from the AGM? Can you give us a synopsis of your experience and insights? Would be very much appreciated!

Cheers
Sauce

vader

03-03-2012, 01:18 AM

I have been to the last couple, its always interesting. You see the slides that they put up as part of the presentation(which is released to the market) but they always explain in much deeper detail and give insights that are not released.
South America- the sky is blue indeed very blue however they are behind where they thought they would be due to building delays and cultural issues. They explained that there is a typical South American saying 'manana" which mean tomorrow. People in SA do not have the same urgency that we have in Australia, even getting confirmation of oders can be up to 3 months. They stressed that they are no where near capacity or forecast revenue at the moment. They expect 12/13 to be the year that will show the immense potential of SA. In-relation to Australia all operations are going well with the exception of Hunter Valley, they admitted they stuffed up on their due dilligence on the acquisition. They stated the it will take new management 3-6 months to fix the problem(a drag on the 2nd half). The operations in Perth are full out to the end of calander year 13 and the other Australian operations have workloading out to the beginning of the first half 12/13. Mentioned that they expect to move ahead with stage 2 of the Indonesia plant pretty quickly due to demand. An interesting point was raised re reduced Capex, they pointed out that they are now only starting to see the replacement of equipment that was supplied 3-4 years ago. Even if Capex spending was reduced the miners will keep producing at their current levels and as they have now entered the replacement cycle the current workloads will be maintained i.e. they produce a consumable product as well as euipment for new mines. Lot of interest around the fact they have now started recieving orders form the world's largest miner (BHP) for new equipment on CAT trucks (first time the customer has done that in their history. I gather by that they mean their products are gaining much better acceptance(their growth over the years no doubt verifies that). They forescat increases in profits and dividends and although they did not rule out any raisings they stated it would depend on the size of the acquisition. They expect to make further acquisitions over the next year. They stated they are noe sen as a big player and some companies look at them and think they can also enter the market and achieve the same success. Austin stated they have a very good relationship with their clients and believe they are always staying ahead of the game. In-relation to debt they stated they are happy around the 20-30% gearing levels. Hope that helps.

Sauce

03-03-2012, 10:50 AM

Vader,

Excellent summary. Thank you very much for taking the time. This confirms a lot of things for me.

Did they mention that the repair/maintenance side of the business was important in those relationships i.e. not only a high margin business in itself but also locks in the customer relationship and makes it harder for competitors? Do you think that integral to Austins strategy?

Did they go into any detail about their studies/plans for Russia/Mongolia & Africa?

Cheers
Sauce

vader

05-03-2012, 03:10 AM

Sauce
Yes they did talk about the repair/maintenance side of the business, very important for them going forward. They stated clients want a total service i.e. manufacture,repair and options. By options they mean new designs and inovative ideas to help them. From what they stated i gather the orders from BHP involved some of these ideas and were the probable cause of BHP for the first time going away from CAT for the trays. They also mentioned that people forget that they supply other products and this is a big part of their overall business. They expect contract wins in SA for repair /maintenance in the new year and going forward will be up to 50% of their business over there.
Personally i think that the repair/maintenance is integral to their business model, big companies such as Rio,BHP etc are looking for companies that can provide specialist solutions for their equipment. New ideas/solutions are key!
I think they are behind where they want to be in re-lation to Russia and Africa and this is due to SA being behind schedule. The MD spends most of his time in SA and is obviously the driver for the business. On a question re management it was pleasing to see that a number of the GM's now had multiple facility responsibilties which spreads the manaement load and prepares them for further responsibilities
Regards
Vader

buns

05-03-2012, 07:26 AM

Vader

I don't want to move the conversation to much away from ANG as there is some great knowledge sharing going on around this thread. But I'm interested in what they meant by multiple facility responsibilities'? Did they talk about this, how it works and its benefits to date?

vader

05-03-2012, 10:41 AM

A company like ANG that grows quickly tend to rely on 1 or 2 particular people, if they grow to quickly they could loose control of the business. I note after thr meeting the GM of the Perth facility now has responsibility for Indonesia and the Pilbara hire business. If i remember rightly the Brisbane manager is responsible for the HV operation. This would be management succession planning and as the company grows managers that want to progress with their careers obviously need to be encouraged. Without managers taking on more responsibilty the 1 or 2 people running a company will not be able to be effective managers and the company will fall apart. to-date ANG seems to managing its growth very well.

Sauce

05-03-2012, 11:36 PM

Thanks again Vader
Cheers
Sauce

Joshuatree

06-08-2012, 10:10 PM

Hi very quiet here. No news i guess since Petrosace purchase and 3 tiny director purchasers. S/P tracking down on small volumes from a high of $5.21 in April to $3.84 today , PE 12.2 . Thoughts Sauce and anyone be appreciated. cheers D

Sauce

07-08-2012, 12:11 PM

Hi Joshuatree

The market is presumably pricing in a decline in Austins markets due to falling commodity prices, assumed lower mining expansion etc.

No update from Austin so the full year should still be in the 45 - 50m ebitda range which should translate to EPS of 36 - 41cents. Their forward order books were full way into 2013 at the half year but the market is looking out further of course.

Comments and outlook from management will be most interesting. Results should be out next week or the week after based on the 15th/16th and 25th/26th release dates in past years.

Personally I don't think there will be a protracted (secular) downturn in the mining sector, but commodity supply imbalances will take time to work through, so its possible we will see many expansion plans curtailed and a significant slowdown in the short/medium term. I agree with IMF view that issues in Europe are more of a worry than China. Emerging markets will still require significant resources, america will come back online sometime in the next decade, and long term I can't help feel that people will always need to pull things out the ground.

No way to know for sure what will happen so no point in trying to make guesses on macro events and which would be a punt in my opinion. I have owned Austin for six years and I expect to still own it in another six years, and I am happy to accept there will be periods of volatility. Any serious trouble in the mining sector and I will be a buyer.

Cheers

Sauce

Sauce

07-08-2012, 12:28 PM

Also, aside from the previous answer (that the market may be acting rationally), theres been no liquidity at all lately, so if someone wants to trade a decent quantity in either direction your going to see the share price swing all over the place.

Regards,

Sauce

Sauce

07-08-2012, 01:03 PM

Great result from Bradken but the cautious outlook speaks to the macro story:

• Limited visibility beyond the first half due to global economic uncertainty with
coal markets appearing to be disproportionately impacted
• Bradken is holding a record order book, with strong order intakes continuing
at this time and first half production likely to remain at full capacity
• Margins will continue to be strongly defensible, but we are minimising capital
expenditure until the outlook becomes clearer
• Capital expenditure is limited to committed projects with $45 million expected
in 1H13 of which $25 million is for Xuzhou foundry and second half
expenditure dependent upon the outlook, but can be contained to $15 million
• F13 sales will benefit from the various expansions including Tacoma, Amite
and Xuzhou foundries and also with the ramp up in high margin ground
engaging tool sales
• There is no debt maturing in the period or near term, with gearing potentially
reducing quickly in the second half

Strong result from Austin almost certain but their outlook statements will be more interesting.

Cheers

Sauce

Sauce

07-08-2012, 03:31 PM

Interesting and potentially relevant point from Vader that the company made at the last AGM as per bold below.

I have been to the last couple, its always interesting. You see the slides that they put up as part of the presentation(which is released to the market) but they always explain in much deeper detail and give insights that are not released.
South America- the sky is blue indeed very blue however they are behind where they thought they would be due to building delays and cultural issues. They explained that there is a typical South American saying 'manana" which mean tomorrow. People in SA do not have the same urgency that we have in Australia, even getting confirmation of oders can be up to 3 months. They stressed that they are no where near capacity or forecast revenue at the moment. They expect 12/13 to be the year that will show the immense potential of SA. In-relation to Australia all operations are going well with the exception of Hunter Valley, they admitted they stuffed up on their due dilligence on the acquisition. They stated the it will take new management 3-6 months to fix the problem(a drag on the 2nd half). The operations in Perth are full out to the end of calander year 13 and the other Australian operations have workloading out to the beginning of the first half 12/13. Mentioned that they expect to move ahead with stage 2 of the Indonesia plant pretty quickly due to demand. An interesting point was raised re reduced Capex, they pointed out that they are now only starting to see the replacement of equipment that was supplied 3-4 years ago. Even if Capex spending was reduced the miners will keep producing at their current levels and as they have now entered the replacement cycle the current workloads will be maintained i.e. they produce a consumable product as well as euipment for new mines. Lot of interest around the fact they have now started recieving orders form the world's largest miner (BHP) for new equipment on CAT trucks (first time the customer has done that in their history. I gather by that they mean their products are gaining much better acceptance(their growth over the years no doubt verifies that). They forescat increases in profits and dividends and although they did not rule out any raisings they stated it would depend on the size of the acquisition. They expect to make further acquisitions over the next year. They stated they are noe sen as a big player and some companies look at them and think they can also enter the market and achieve the same success. Austin stated they have a very good relationship with their clients and believe they are always staying ahead of the game. In-relation to debt they stated they are happy around the 20-30% gearing levels. Hope that helps.

Joshuatree

16-09-2012, 11:04 AM

Hi Sauce, just had a look at ANG presentation again. Theyve come in at top end of guidance, record result i think?. Everything up including div ,looks fantastic but gearing up ,cash flows down; i cant join the dots to explain this. Truck body and bucket replacement entering a good cycle. A few flattish regions growth wise ahead but majority of regions and sectors ANG confident on growth.

Really liked this simple truth " World population could grow by another Billion by 2020. This will mean that mining will have to increase ,as most things used in everyday life will have an association with something that is taken from the ground"

Positive outlook ahead. How would you rate s/p value wise atm Sauce. Thanks again for your hand in glove intricate understanding and sharing. cheers d

Sauce

16-09-2012, 01:45 PM

Hi JT

Yes, very solid result, but to be fair they really needed it to maintain the trajectory of the growth in intrinsic value. The reason is because the capital they raised a few years ago had diluted the equity base but we had not yet seen the returns required to keep the intrinsic value rising. So the market has been somewhat rational in sending the share price sideways over the last couple of years (albeit with some very irrational short term swings! a good reminder of the weighing vs voting machine analogy of Buffetts). That being said, the expected revenue and profit flows from the recent capex program in SA and Indonesia is growing fast now, so those buying today are effectively locking in the 'time value' of all that capex for themselves, at the expense of those who held for the last two years and are selling now. In other words, I think Austin is undervalued.

Regards,

Sauce

Sauce

16-09-2012, 02:24 PM

Everything up including div ,looks fantastic but gearing up ,cash flows down; i cant join the dots to explain this.

To put the cashflows in perspective you have to look at the current years 24.6m of net operating cashflows (vs profit of 29m) in context with the 43.7m (vs profit of 21m) from the previous financial year.

Austin received 18m in advance payments just before the end of the financial year. These are recorded as a current liability under 'trade and other payables' on the balance sheet (note 16 in annual report) and were unwound in the following financial year when the product was delivered and the balance paid, which is when it is booked as revenue. Hence lower cash flows but higher profit, and the opposite the year before.

In other words, If you smooth the cashflows out over the years you get a better picture.

Cheers

Sauce

Sauce

16-09-2012, 03:03 PM

Here's a quote from Vader's great post on the comments from the MD at the AGM:

South America- the sky is blue indeed very blue however they are behind where they thought they would be due to building delays and cultural issues...... They stressed that they are no where near capacity or forecast revenue at the moment. They expect 12/13 to be the year that will show the immense potential of SA.

This was before the last result, and you can see from the second half 11 vs first half 11 that the revenue and profits from SA are growing very quick - and with increased revenues comes increasing margins due to the operating leverage - you can see the ebitda margins grew to 19% in the second half for the Americas segment. This trend will continue with higher margins again this year.

As they said, FY13 was always looking like the year, and every scrap of evidence is that its coming..C

Cheers

Sauce

Sauce

17-11-2012, 07:00 PM

Vader you still out there?

vader

20-11-2012, 01:16 PM

yes sir, still here

vader

24-11-2012, 12:06 AM

Sauce did you get to the AGM and what are your views? Just read the presentation, compared to the other mining service company downgrades, probably not to bad?

vader

21-02-2013, 05:55 AM

Broker told me ANG results released tomorrow 21st

Sauce

21-02-2013, 09:18 AM

Broker told me ANG results released tomorrow 21st

Should be today before market open.
Since no updated guidance I expect 45 - 55% increase on PCP still on cards
Revenues from Indonesia and Westech in the US could be disappointing due to funk in coal markets.
Also 60m cap raising for africa/russia expansion highly likely if not certain.
The most interesting thing will be the progress in SA. This will be the first result with all the new revenue streams online from the heavy capex of last few years.

vader

22-02-2013, 03:01 AM

my broker tells me result as expected, one of the few mining service's company that performed well. i suppose with the maket going backwards end of day price was fair. Brazilian contract interesting.

Joshuatree

30-05-2013, 10:17 PM

ANG drifting down with many M/S companies. Last presentation in FEB highlighted Perth as strong but most other areas not so. With re two thirds of earnings in Aus and a big exposure to coal and Iron ore and no sign of the big contract in brazil would $4 be a reaonable guesstimate over coming weeks? Outlook in FEB was for increased profits over previous year.

Grundfos

31-05-2013, 12:41 AM

Yep that decision to express strong confidence in the Vale contract (and then willingness to leave us blind for months without updating the market on its loss/delay) has been very disappointing.

On the bright side BKN are known for being much closer to a tight-fisted weasel than they are a credulous lamb, and they paid $4.80 within the last month. Their CEO Hodges make a point of picking up on an analyst during the February earnings webcast for lumping them (and Austin, who were briefly mentioned a bit later) in with the general M/S sphere, rather than what he felt were the much more defensible margins of mining products coys. "They add a lot of value to the end customer, they have a huge effect on his costs per tonne and they cost very little. It's quite a different thematic".

FarmerGeorge

06-06-2013, 08:19 PM

Lower AUD + big drop in SP is starting to make ANG look attractive again. I think that div is sustainable, like that BKN increased position, and like track record and mgmt. News on Brazil would be nice or have I missed something here?
BKN might be worth a look as well?

Joshuatree

06-06-2013, 08:47 PM

Whats the rush! A lot of money is being pulled out of Aus and NZ , who knows where a bottom is; there maybe a capitulation day ahead Cant always find the volume of shares sold today on the ASX, anyone have that comparable fig? cheers(musical) JT

FarmerGeorge

07-06-2013, 05:46 PM

Fair enough jt - I'm just never that good at spotting capitulation until it's too late!
But you were right for at least one more day, looks like closing under $4 today. If this goes on another week I'll be a happy farmer...

Joshuatree

07-06-2013, 07:28 PM

Appreciate your thoughts Sauce, i dont think anyone knows more than you about ANG cheers JT

Sauce

07-06-2013, 08:39 PM

Hi JT

I will come back and post my thoughts for what they are worth in some detail soon. But please take it for what I suspect its worth - like most things posted anonymously on the internet: not a lot!

Cheers

Sauce

08-06-2013, 12:50 PM

Hi JT

Austin’s revenue is largely recurring (as long as they long as they don’t lose their customers to competition) as their products are consumable. For instance dump trays need to be replaced in three to four years. I use trays as the example they make up 60-70% of Austin’s sales from memory but all their products are production related and consumable or otherwise recurring like equipment hire in Calama and all maintenance operations.

So they obtain sales from orders for new mines opening – i.e. mine expansion - and they also obtain orders from existing mines who are replacing old equipment.

Let’s look at the new sales first. There is no doubt that new mining equipment sales are coming ‘off the boil’ so to speak – that is obvious.

In my opinion, the best place to start is www.parkerbaymining.com (http://www.parkerbaymining.com/) who are a data service provider to the industry (in fact they list Westech, which is Austin, and Bradken as their clients), and they maintain a database of surface mining equipment from mines over the world. Please note their sales data is for the machines, not the after market parts. So I believe this reflects Austin’s potential new/expansion sales market and does not include the replacement market. Here’s a nice quarterly sales graph to May 2013:

4582

The end of 2011 and the start of 2013 was clearly the peak of the recent up cycle in surface mining equipment sales, having come off about a third since the peak. But bear in mind where it is coming from – these are enormous numbers and we are currently a long way from the slump that occurred in 2009 during the GFC (and as a side note, Austin increased profits throughout that GFC trough).

There is one a bright spot in these numbers. So far new mining equipment sales in South America has increased year on year in 2013 and that is off booming numbers in 2012 as well. In fact, in South America CAT sales are up 28% yoy in April

(you can view this information here: http://www.caterpillar.com/cda/files/4350908/7/2013%20(April)%20Monthly%20History.pdf)

and Komatsu said that in the year to March 2013 “demand increased steadily for mining equipment in Latin America”. I think this is very significant for Austin as I will get to later on.

The real basket case appears to be the coal markets – and specifically Indonesia. This is a shame with Austin doubling capacity their. Management indicated at the outset that they intended part of the capacity to backup WA and service the Mongolian market so hopefully that fills some gaps. It seems that coal mines in general have a much higher marginal cost of production than say, Iron Ore. Hence lower prices mean that mines stopping production.

There is a very interesting graph in this report that shows what I mean (exhibit 6 page 7):

http://www.booz.com/media/file/BoozCo_Profits-in-a-Slowdown.pdf.

So, Iron Ore production should be much more resilient to price shocks than, and it certainly appears that this has been the case.

So that brings us to the replacement cycle. According to Austin the replacement cycle started in approximately 2009 – with a significant amount of trays and other equipment being replaced from then onwards. It certainly makes sense that Austin’s deep market penetration in Australia over the past decade has the potential to provide a tail of replacement work that should steadily increase going forward as the high volumes of the last few years start to turn over.

So in summary, while Austin will not be immune to the down cycle due to the drop in new truck sales in most markets, they are largely leveraged to the production cycle. I also believe that the tail of replacement work will largely underpin their revenues.

Here are a couple of comments from management (2012 Annual Report):

“There has been much commentary in recent times concerning the reduction in
the price of commodities and the delay in new mining investments. The majority
of the products that we supply are “wearing products” and as such need
replacement so the price of commodities is less relevant to us than the quantity
of commodities extracted.”

“The replacement cycle for a significant number of mining products
such as dump truck bodies and buckets supplied by Austin to key
customers in 2007-2008 has also now commenced. This will continue
to grow over the coming years and will alleviate some concerns in
coal markets as product demand continues”

I also note that Bradken and Komatsu have both stated recently that production related consumable sales are still strong.

There are approximately 38,500 Haul Trucks currently in use in the world’s mines. The consumable part is the tray, and, from the limited information on pricing available I gather they cost as much as 400k each for the ultra class ones, and seem to average at about 200k per unit. Remember these trays are truly HUGE – the big ones haul 360 mt – that’s a lot of steel. So I estimate the global tray market at around 7.7 billion – or say $5billion to be conservative. Their Chilean operations alone have over 1000 trays operating close by and the business Austin bought there had 70% of the market. Austin’s business is diversified both geographically and among commodities also. Overall, my best guess is that the world is not going to stop digging things out the ground.

So what about overall profitability and returns?

For me, a much bigger concern than the current mining down cycle has been the fade in profitability. For instance, Austin’s ROE has halved in the last 7 years (from spectacular to merely excellent):

49%

35%

40%

36%

23%

22%

25%

This reflects the fact that the asset base has been expanding faster than the earnings. The question is why.

If we turn to some DUPONT analysis we can break down the factors influencing the ROE to figure out what is causing the return fade – i.e. is it lower asset utilisation or lower margins or both.

If we look at pretax margins they have actually been increasing:

16%

18%

14%

14%

14%

17%

19%

But if we look at the asset turnover (sales divided by assets – to measure how many $ of revenue each $ of asset is generating) we get a big clue as to where we should be digging:

1.78x

1.93x

1.36x

1.77x

1.09x

1.02x

1.12x

With margins increasing but asset turnover dropping considerably it is clear we need to focus on the revenues relative to assets to figure out what’s going on with the ROE. Austin has expanded rapidly through retained earnings and through external capital. In recent years most of these funds been spent in South America. In fact, the balance sheet now carries approximately $120m of assets in South America.

The ratio of revenues to assets in Australia over the last three years is still consistent with the earlier years of high ROE for the group:

1.61x

1.27x

1.62x

However, the ratio of revenues to assets (asset turnover) for South America (last three full year results) is dismal in comparison:

0.33x

0.30x

0.34x

In other words, the assets in South America have not generated anywhere near the revenue in proportion to the amount of money they have invested there. Yet.

Why? Firstly, we know they had a big delay with getting La Negra off the ground and operations shifted to the new facilities – and slow to then ramp them up. Also Peru & Columbia have not been online long enough to contribute significantly yet. From management:

“In addition the new business in Peru that was acquired in April
2012 made a small positive contribution. The facility in Colombia commenced
operations only in June 2012 and made a negative contribution due to startup costs.”

I also suspect that like most foreign expansion, cultural differences, slow way of doing business over there, and all those kind of factors have been at play, and there is possibly some risk that those factors are a barrier to Austin ever achieving the returns they sought at the outset. It is also important that the reason is not stiff competition.

BUT. I personally believe the returns are coming. You can see the rate of revenue growth from SA is very high. From management:

“The Americas delivered a 104% increase in EBITDA in the year underpinned by solid performance in North America and increasing workflows from the Chilean operations as the year progressed. “

And from my own analysis - removing the North American sales, revenue from South America leapt from 18.93m in FY 11 to 41.06m in FY12 – they won’t have to achieve anywhere near increases like that for very long….

Here are recent comments from management on South America:

“Your Board visited the South American operations in June of this year and can
confirm that the opportunities are very exciting, not only in the countries where
we have facilities, but also in other countries in the region to which we can supply
our products and services.”

“South America expected to return significantly increased revenue and profit contributions over the coming years

“The result for the half-year only partly reflects the real potential of the group’s capabilities”

So revenue growth in SA is what we want but here is the kicker: Due to efficiencies of repetitive manufacture - the operating leverage - the margins increase enormously the more fully utilized the assets - manufacturing sheds - are. Even at asset turnover of just 0.3x they have 19% margins in SA higher than AUS. Consider that in Australia they have 130m of assets generating 200m+ pa in revenue, which at pretax margins of 17% or so are capable of generating $34m+ in EBIT.

They have approx $120m of assets in South America that have not been fully utilised in past results. I believe when they bought Conymet the operating margins were 34%.

SO. You can play with some conservative numbers to see the range of possible revenue and earnings outcomes as they ramp up in SA:

0.5 x assets with a 19% margin = 60m revenue and 11.4m in EBIT
1.0 x assets with a 20% margin = 120m revenue and 24m in EBIT
1.3 x assets with a 21% margin = 156m revenue and 32.76m in EBIT
1.7 x assets with a 22% margin = 204m revenue and 44.88m in EBIT

I think the odds are good that over time they will earn more from SA than from AUS due to much higher potential margins (at the higher turnover multiples the margin should comfortably exceed 22%).

VALE – Still waiting. But not the only contract out there! Although it appears it would underwrite the ramp up in capacity utilisation for Chile. I believe an announcement on this contract would excellent evidence of sustainable success in SA.

It’s worth considering that it may continue to take some time to fully penetrate the market – and of course, there’s always risk that for some reason they never fully replicate the success in Australia. Things certainly didn’t pan out with the pace they expected, this is what they said about SA before entering the country:

“Potential for South American revenue streams to be greater that Australian revenue streams within two years”

What about valuation versus price – where are we at now?

WB has makes a great point when he points out the irony in how humans in general think about asset prices: People ‘feel’ excited when assets they own go up in price, and they ‘feel’ sad when asset prices they own go down – but this is not a wise psychological trait we have acquired. A business asset will generate a certain amount of cashflow over its lifetime and it makes sense to purchase all that future income as cheaply as possible, not when it is more expensive. So if you are buying the business – i.e. all those future cashflows - you should get excited when the price of good businesses goes down. This is true even if the price is dropping on very real near and even medium term earnings declines. This is because the intrinsic value is the discounted flows of cash over the entire life of the asset – not just a few years ahead. But the market; Wall Street, funds, retail investors etc, don’t think like that for a variety of reasons. Generally, everyone is so fixated on the near term earnings announcements that prices can get driven down in the to levels that do not reflect the longer term cash generation– this is where the lowest risk opportunities are in share market investing in my opinion. Patient value investing is effectively a ‘time arbitrage’ which is the advantage that long term investors have over short term investors. In other words, negative sentiment can represent excellent opportunity for patient investors.

Of course this means nothing if you can’t pick a good business that can continue to profitably increase earnings over its lifetime which I think is a lot harder than it sounds.

With regards to Austin, sure, there are macro headwinds, but in my opinion this is a very attractive high margin business. The underlying asset expansion, geographic and commodity diversity, replacement cycle, future geographic expansion, and various strategic advantages, put them in an excellent position over the longer term. I also suspect that their business is to a large degree more ‘anti-fragile’ than say, contractors, and they will be more resilient in the shorter term than the market is giving them credit for.

I’m not going to make any predictions on EPS as I think that kind of thinking and speculation is incorrect. I think the intrinsic value is a lot higher than it is today, but the share price could go a lot lower in the short term and there is no way predicting that.

Of course, I could be very wrong. It’s possible that I am deluded by boom-time-peak-of-cycle profitability that is about to disappear completely as China hits the wall and commodity prices enter a secular slump. Time will tell (many years not a couple).

My concern is that they are likely to announce further global expansion and raise capital at some point – diluting our holdings during a slump in the share price. I also hope BKN don’t make a move on fearful retail investors at a cheap price – Austin’s register is made up of 3000+ small shareholders making up the bulk of ownership. It could be like lambs to the slaughter.

Sorry about the length of this reply JT - I hope it helps.

Cheers

Grundfos

09-06-2013, 03:11 AM

My concern is that they are likely to announce further global expansion and raise capital at some point – diluting our holdings during a slump in the share price. I also hope BKN don’t make a move on fearful retail investors at a cheap price – Austin’s register is made up of 3000+ small shareholders making up the bulk of ownership. It could be like lambs to the slaughter.

Yes exactly, this. Terrific post Sauce, great links too. I'd love to see any other great finds you've had like Parker Bay, or any lesser-known tickers you'd suggest for an Austin-themed watchlist.

Buckland's aversion to the glad-handing or 'out on the stump' side of a CEO's role was something I really liked (as I think you did) initially, but you'd say a naive market and analyst ignorance hurt holders with BKN's rise to 20% in the first place, and would hurt holders again if they're in any position to move this winter. Anyone expecting an eventual lavishly generous bid from BKN I think will be completely mistaken.

Joshuatree

09-06-2013, 08:34 PM

Sauce

09-06-2013, 09:48 PM

Yes exactly, this. Terrific post Sauce, great links too. I'd love to see any other great finds you've had like Parker Bay, or any lesser-known tickers you'd suggest for an Austin-themed watchlist.

Buckland's aversion to the glad-handing or 'out on the stump' side of a CEO's role was something I really liked (as I think you did) initially, but you'd say a naive market and analyst ignorance hurt holders with BKN's rise to 20% in the first place, and would hurt holders again if they're in any position to move this winter. Anyone expecting an eventual lavishly generous bid from BKN I think will be completely mistaken.

Hi
Thanks. Paul Moore has written some interesting articles for mining magazines on the tray market which are worth reading if you can track them down (the one called Body Beautiful from 2009 gives an interesting perspective on the industry).

Sauce

09-06-2013, 09:57 PM

Thanks for reminding me how 2 dimensional i am:) Sauce when it comes to analyzing and researching and remembering it.. Your post reminds me of camden55 a retired fund manager who posts on H/C. Very thorough and detailed and explaining clearly. I/ We are lucky to have such quality people willing to share with all. Thanks for your time and effort and generosity.Will keep watching ANG and looking at the Macro picture.
Hi JT
Thanks. I'm glad it was useful worth the effort. Camden is a smart fellow indeed - more experienced and knowledgeable than me.
Cheers
P.s. I think Warren Buffett would call watching and looking at the macro sucking your thumb? ;-) (thats a joke that might make more sense if you have ever read his comments on thumb sucking, I hope it comes across in the right way!)

Joshuatree

09-06-2013, 10:25 PM

Grins; maybe im watching other people watching, these "Macros" and selling down, and i will be waiting for a poss entry.

Joshuatree

13-06-2013, 12:31 PM

Sheesh $3.59 out with the bath water!!! Still watching but risk galore with all M/S companies unfort.

Sauce

13-06-2013, 01:01 PM

Hi JT

Personally, I think that depends how you define risk.

Potentially, the lower the price goes the less risk there is. Of course that assumes you feel you can roughly quantify the odds of good future outcomes. Since I can't pick the bottom I am happy to pick up a few as I feel that price doesn't reflect eventual earnings power of the expanded asset base - conservatively appraised.

All just my opinion though.

I agree that Austin won't come out of this unscathed in the short term.

Cheers

Grundfos

13-06-2013, 01:01 PM

Yep I'll now be buying steadily over the next two weeks of tax loss. Hopefully it doesn't plunge fast enough this afternoon for an inquiry, then a MaxiTRANS-style reversal the day after.

Grundfos

13-06-2013, 02:55 PM

http://www.fnarena.com/dsp_recommendations.cfm?searchsymbol=BKN

BKN's target price slashed by CIMB today I notice btw, $6.50 to $4.00.

Joshuatree

13-06-2013, 10:58 PM

Thanks Grundfos. The price targets range from $4 to nearly $8!! :confused:

Sauce

14-06-2013, 01:44 PM

Relevant (possibly ;) ) wisdom from Seth Klarman:

"Most investors strive fruitlessly for certainty and precision, avoiding situations in which information is difficult to obtain. Yet high uncertainty is frequently accompanied by low prices. By the time the uncertainty is resolved, prices are likely to have risen.
Investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty.

The time other investors spend delving into the last unanswered detail may cost them the chance to buy in at prices so low that they offer a margin of safety despite the incomplete information."

Grundfos

17-06-2013, 08:29 AM

A bit of a piece on Westech from their local newspaper back in March.

http://www.casperjournal.com/news/article_4e61908e-d665-529f-8144-3ba3461e18d3.html

We ship in Mongolia, we ship in Africa, it just depends right now,” added Shellenberger. “Hopefully we’ll get something in Russia here, at least to start. I’d like to ship product in there before we actually build the facility in Russia because I’m not too … I’m not real keen on it. My bosses in Australia are more aggressive than I am.”

“$30,000 allows me to keep somebody on staff because right now, honestly, with the coal industry going down, coal is 35 percent of our business, whether it’s in Gillette or back east, it was 35 percent of our business. So, right now, my employment’s down about 25 people from where I was. I’m having a number of people leave because they live off of overtime, and I cannot give them overtime. I just am trying to keep them employed right now to fill the gap.”

“Casper Wyoming is like an ideal location because we can service the coal, we can service the gold in Nevada, we can service the copper in Arizona, and the oil sands up in Canada, which is Fort McMurray,” Shellenberger replied. “The problem is, once we get out of the state of Wyoming we do have to ship in pieces … So in the great state of Wyoming, I can ship one piece, and it saves us money, and it makes us more competitive up in the Basin, and also is good for the coal miners up there as far as saving costs.” Shellenberger said Wyoming’s coal mines were some of the few customers for its largest truck bed, noting most operators haul denser, heavier, material, and so had to use smaller units. Wyoming was also unique because many oversized loads can still be transported in one piece.

Also, Buckland (I think) at a charity run in Chile last year -

http://www.region2.cl/wp-content/uploads/2012/09/CORRIDA_POR_LA_VIDA-6.jpg
http://www.nuevamineria.com/revista/2012/09/21/trabajadores-de-austin-engineering-se-ponen-la-camiseta-por-la-vida/

Joshuatree

17-06-2013, 02:36 PM

AFR Smart Investor June
Shares For All Weather
24 rock solid Companies that deliver consistent and reliable earnings year after year
ANG is the only one with a 5, strong buy , when s/p at $4.65. Still watching the mkt atp

Grundfos

19-06-2013, 10:41 AM

Vale Lifts Output as Ore-Price Drop Hits Mines: Corporate Brazil

By Juan Pablo Spinetto - Jun 18, 2013 2:00 PM GMT+1200

http://www.bloomberg.com/news/2013-06-18/vale-lifts-output-as-ore-price-drop-hits-mines-corporate-brazil.html

Vale SA, the world’s largest iron-ore producer, aims to increase production to record levels in an attempt to win back market share while higher-cost competitors are hurt by falling prices, said Executive Director for Ferrous and Strategy Jose Carlos Martins.

The Rio de Janeiro-based company can produce as much as 350 million metric tons next year, 40 million tons more than this year, Martins said in a June 14 interview. Vale is sticking with an official target of 326 million tons given in December (http://www.vale.com/EN/investors/home-press-releases/Press-Releases/ReleaseDocuments/PREPORT1T13_i.pdf), the press department said by e-mail yesterday.

“Forty million is something we believe is possible,” Martins, 63, said from the company’s Rio headquarters. “There is space for Vale to grow by recovering market share and by kind of squeezing high-cost producers.”

Vale is seeking to stem a slide in market share since 2007 after its biggest rivals, Rio Tinto Plc (RIO) (http://www.bloomberg.com/quote/RIO:LN) and BHP Billiton Ltd. (BHP) (http://www.bloomberg.com/quote/BHP:AU), increased output at a faster pace. While Rio Tinto (http://topics.bloomberg.com/rio-tinto/) and BHP, the second- and third-largest iron-ore miners, raised production of the steel-making raw material by 37 percent and 43 percent, respectively, from 2007 to 2012, Vale’s output rose 5.5 percent in the period amid environmental permit delays and aging mines.

Expansion Delays

Vale is scheduled to start five iron-ore projects by the end of 2014 with an estimated combined capacity of 87 million tons at a cost of $8 billion, the company said when reporting first-quarter results (http://www.vale.com/EN/investors/Quarterly-results-reports/Quarterly-results/QuarterlyResults/VALE_IFRS_USD_1T13i.pdf) April 24. The Carajas Additional 40 Mtpy project in Brazil’s northern state of Para and the Conceicao Itabiritos venture in Minas Gerais (http://topics.bloomberg.com/minas-gerais/) are planned for the second half of 2013, and the Vargem Grande Itabiritos, Conceicao Itabiritos II and the Serra Leste projects are set to start next year.

The company is also advancing with its Serra Sul S11D project in Carajas, the world’s largest iron-ore complex, which is the industry’s most expensive venture with a cost of almost $20 billion for the mine and logistics. The project is expected to start operating in the second part of 2016.

While the company is experiencing delays at expansions of its Carajas and Minas Gerais mines because of Brazil’s tight labor market, the holdups are unlikely to change its schedule, Martins said in the interview.

“It will not be a big delay because we have several projects, so one month here, two months there, three months there,” he said.

Vale’s new projects will allow the company to recover the market share lost since 2007, Martins said.

“When this new capacity comes on stream we are going to get market share back because our cost is much lower than others,” he said. “A big part of those guys are not cost effective in a lower price scenario.”

Grundfos

01-07-2013, 08:04 PM

https://www.google.co.nz/search?q=Theories+abound+on+small+cap+sell-offs&oq=Theories+abound+on+small+cap+sell-offs (https://www.google.co.nz/search?q=Theories+abound+on+small+cap+sell-offs&oq=Theories+abound+on+small+cap+sell-offs&aqs=chrome.0.57&sourceid=chrome&ie=UTF-8)

Theories abound on small cap sell-offs

CRITERION
July 01, 2013 12:18PM

HAPPY new financial year - but hold the home-brand spumante because there's some serious stock trawling to do.

In the wake of the traditional end-of-period sell-off of portfolio laggards in order to harvest tax losses, today's the day to consider stocks that have been trashed for that reason alone.
Patersons' analysts have identified a number of small cap stocks - mainly in resources - that have been trashed since May 20, without accompanying bad news to explain the sell-off.
The small ordinaries index had a Julia Gillard of a year, declining 9 per cent in contrast to the broader market's 17 per cent gain and has also fallen 10 per cent over the past six weeks.
"The stocks in the small ordinaries are more illiquid than large capitalised stocks and tax loss selling from less discerning investors can present buying opportunities,'' the duo say.

Austin Engineering shares (ANG, 25c) are 25 per cent off the pace. There's been scarcely a boo from the company since its February half-year results. But with the maker of dump truck and excavator bodies heavily exposed to the mining sector, it's not surprising this one's not being given the benefit of the doubt.

As with all investment theories, caution is required and it's possible that many of these stocks are simply dogs or will continue to struggle against generally poor sentiment.
But in identifying pockets of relative underperformance, at least Patersons has directed punters to needles of potential delight in a haystack of woes.

Trading at 25c? :mad ;:

I see BKN said their FY guidance was largely propped up due to the strength of their consumables focus. I guess they wouldn't mind accumulating more of our stock right now if they're utterly convinced the general market is as dumb as rocks on this point, and they liked us at $4.80. Up to 3% during any six-month period, I believe the creep rule still is in Australia.

FarmerGeorge

01-07-2013, 08:37 PM

Thanks jt, Sauce, Grundfos. All good contributions - I can't add much except as a response to Criterion's quote above "but with the maker of dump truck and excavator bodies heavily exposed to the mining sector, it's not surprising this one's not being given the benefit of the doubt." I think this is just an off-the-cuff comment, rather than considered analysis.
I've held ANG in larger and smaller amounts for years. If I trawl back I probably had some back and forth with davidrob when this thread first started. I only had a few up until a fortnight ago now I hold more and I'll probably buy a few more if I can get them in the $3-$3.20 range.
Wish I could offer some more insights but I think they've pretty much been covered off above.

Grundfos

04-07-2013, 02:00 PM

Notice analyst consensus has changed abruptly today. I wonder if Patersons etc. managed to engage in a proper dialogue with Austin after their silly little speculative piece.

2012
2013
2014
2015

EPS
41.0
41.6
39.8
47.1

DPS
14.0
15.0
15.5
15.8

Source: Thomson Consensus Estimates

Last week....

Earnings & Dividends
Forecast (cents per share)

Current
2013
2014
2015

EPS
41.0
46.1
50.7
55.4

DPS
14.0
16.7
18.4
19.7

Source: Morningstar analyst estimates

Joshuatree

04-07-2013, 03:27 PM

Maybe ANG will release an update now

FarmerGeorge

04-07-2013, 04:50 PM

Grundfos

04-07-2013, 05:22 PM

Forecast Earnings Trend Details

Year Ending 30-06-13

EPS (c)
PE
Growth (%)

Median
41.60
7.60
1.30

High
47.70
6.60
16.30

Low
40.10
7.90
-2.40

7 Days Ago
46.00

30 Days Ago
46.10

60 Days Ago
46.10

90 Days Ago
46.10

Number of Analyst Estimates: 4

Year Ending 30-06-14

EPS (c)
PE
Growth (%)

39.80
8.00
-4.30

49.30
6.40
3.40

36.90
8.60
-7.90

51.00

50.70

50.70

50.70

Number of Analyst Estimates: 4

Contributing Analysts

Bell Potter, CBA Institutional Equities, Moelis Australia Securities, Patersons Securities Ltd

FarmerGeorge

04-07-2013, 09:23 PM

Thanks Grundfos - appreciate the update

Joshuatree

05-07-2013, 09:49 AM

Yes cheers for that Grundfos.

Grundfos

05-07-2013, 05:17 PM

Yes cheers for that Grundfos.

Bell Potter largely responsible by the looks, the sole FGE analyst. They've given the 'caught us by surprise, but the boom's definitely over' treatment to FGE estimates also.

FarmerGeorge

24-07-2013, 10:03 PM

Nice quick spike here - as ANG has a tendency to do. Not sure if this is anticipation of a positive result or just 'not as bad' as people were thinking a few weeks back.

vader

25-07-2013, 03:56 AM

Speaking to my local broker in melbourne(Bell) they stated the spike is in response to mining services being oversold.Quoted Ausdrill,also stated they expect the next 12 months to be very difficult

Sauce

30-07-2013, 03:13 PM

Re broker comments; I've personally never found trying to guess what the market is guessing to be very productive.

As a related rant: I find it mildly incredulous how often market participants try and outguess each other and play the 'expectations' game. It is amazing how the thinking is so short term. The variables are so great that odds of having an edge without inside information is very unlikely - and even then the market can act so bizarrely you can still get the direction wrong. Of course it can work once or twice or three times due to luck and randomness, but is just so likely to be a losing proposition over the long term... Each to their own of course - I am not sitting on my high horse saying everyone should invest in one way, that would be naive indeed.

To translate these general thoughts to Austin: The key - in my opinion (for what little that's worth) - is the expansion of the asset base over the last four years - and indeed the potential for further expansion of the asset base, albeit delayed, in Africa and Russia.

It is highly likely that Austin will be a story of two sides to the coin in the near term - with increasing profits from South America and much tougher times in Australia. But the earnings potential in South America is massive and the underlying asset base and corresponding future earning power across all the countries they now operate in is much greater than the market is giving Austin credit for - in my opinion of course.

Even in normal times management won't know exactly what earnings will be six months or a year out, but you can bet they have a good feeling for where the business is heading over the long term. The near term earnings are largely irrelevant. The miners belt tightening cycle will have an effect on Austin for certain, but they cannot put off their sustaining capex forever. These are wearing products which are essential to operations. The cycle will turn around at some point and guessing when is impossible anyway.

A good analogy is a rental property. If a rental property becomes untenanted for a couple of months, the market doesn't discount the price by 50% - It is quite obvious that the future earnings power is still intact and will be received eventually and, in general, the intrinsic value changes little if at all.

In commercial property, where a tenant might not be found for a long period of time, the property may be able to be bought cheaper due to the uncertainty over the future tenancy and/or the inability to finance the property without existing cashflow. But that is where gains can be made for those with cash who are willing and able to take a longer term view.

I think this is a reasonable analogy for what is even more pronounced in stocks where the clouds are perceived to be darker, and additionally, the liquidity of the instant auction system compounds the short-term-ism. Combined with tax loss selling, and perverse institutional incentives for short term results like beating benchmarks, the environment in stocks is so ripe for low risk 'time arbitrage' situations where patience can pay off big.

In times of the biggest distress there is the most opportunity: fishing where the clouds are darkest is always going to lead to excellent opportunities for outperforming the average due to human nature. And conversely, following the crowd out of sectors and stocks will always be more likely to lead to average or below average results. Leverage is another trap for the impatient - forcing people to sell at the worst possible times (or at best making it impossible for them to do anything but hold)... whereas the opposite (holding cash) creates the opportunity to profit from forced/panic sellers because the worst times to sell are the best times to buy; a much smarter and lower risk strategy. Another WB quote comes to mind - "The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient"

I think Austin is equally likely to post disappointing, average, or good results next month, largely depending on how they are going in South America. And I expect there is potential for more extreme volatility in the share price. It is also possible that the first half of this year (13/14) suffers the worst of the slowdown due to the length/timing of orders. Whatever the short term outcome is, it is further evidence that their strategy has been successful in South America that will be more interesting and important to the longer term thesis.

This is just an opinion of course.

FarmerGeorge

30-07-2013, 05:36 PM

Sauce

30-07-2013, 06:13 PM

Thanks for the thoughts Sauce. Appreciate the time you put into your posts.
Two key points you make which I have also been thinking about: potential for more volatility (ANG has a history of it), and evidence longer term strategy is or is not working. Outlook and forecasts, as usual I suppose, should be the target of our interest more than last years EPS. Though of course I'd take a strong EPS number as well, if it's going.

You could even make an argument for preferring a disappointment in EPS if you are a buyer of the stock who is confident about the future. We can't expect things to go up in a straight line - the real world is not that tidy (with some notable exceptions in terms of profits, but not share prices!).

It is structural issues, such as competition, or problems gaining traction in South America despite several years of expansion that would be of more concern. I think there are good odds that Austin will be proving themselves in SA and I really can't see any competitive threats on the immediate horizon except maybe a remote possibility that Komatsu may be trying to be more (directly) active in tray aftermarket.

Cheers

vader

22-08-2013, 02:01 AM

Sauce, great comments.After seeing the results of other mining services companies i expect a lower result. Long term, like you i see upside with SA anf that will drive their results in years to come. Looks pretty nasty in Australia from what is being released to the market.

vader

22-08-2013, 02:06 AM

Told Austin release their results 22nd and not to expect too much. Shaws say consolidation with growth to accelerate in SA following brazilian contract

Joshuatree

18-12-2013, 12:11 AM

Looks like game on with Bradken $5.14 proposing a takeover..75 Bradken share for 1 ANG. Undervalues ANG @ $4.13 but the board are willing to engage in discussion

Company expecting 2013/14 Ebitda $40-$50 million

Also cap raise of re $30 million and spp @ $3-$3.20

DarkHorse

03-02-2014, 04:12 PM

I've held a fairily small parcel of these for the last few months, entitling me to $5000 worth at $3.20 each in SPP. Any thoughts from longer term holders out there more familiar with the price behaviour re how it's likely to go post capital raising?

Huang Chung

12-02-2014, 03:30 AM

Reckon Bradken might be waiting for ANG to trip, and then swoop decisively.

ANG, unlike Forge, for example, is in the business of mining consumables, so, sooner or later, business will again flow their way.

DarkHorse

12-02-2014, 10:53 PM

More importantly, what do you think will happen to the share price if ANG miss their second half forecast?

"Bradken notes the revised profit outlook for Austin provided as part of the capital raising, which is below previous market consensus at the lower end. Bradken also notes Austin’s expectation that 80% of full year EBITDA will be achieved in the second half of 2014"

Good point KW - I have also felt wary since seeing Bradken's statement a few weeks back - although SPP plan offer discount to current SP was too good to refuse I've already sold existing shares. How's management's track record re earning estimates over the years - can anyone enlighten me?

Huang Chung

26-02-2014, 03:45 PM

Huang Chung

27-02-2014, 11:54 AM

And trip they did.

But will Bradken pounce?

Guess the answer is 'no'.

http://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=01495862

Huang Chung

27-02-2014, 04:10 PM

You've called this one beautifully KW.

Your words of caution nagged at me (especially the 80% of full year EBITDA) and I ended up cutting my position after giving it a bit more thought.

I owe you a beer or three!!

DarkHorse

28-02-2014, 10:45 PM

Ditto, glad to be out and KW's words of wisdom reinforced my concerns nicely too.

Joshuatree

01-03-2014, 05:29 AM

Hey Sauce long time no hear ;i take it this just water off a ducks back for you; longterm:)

mark100

22-05-2014, 12:32 PM

Bell Potter seem to think the latest downgrade will put banking covenants at risk. For anyone playing this one best to keep that in mind

Grundfos

22-05-2014, 03:18 PM

Any chance someone with AFR access can tell me what Trevor Hoey has written about directors unloading their shares on the market? Which directors?

Grundfos

22-05-2014, 03:22 PM

An old but quite good article from 2008 on VR Steel -
http://www.miningreview.com/truck-bodies-for-massive-open-pits/

Grundfos

22-05-2014, 03:25 PM

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.samining.co.za%2Fpdfs% 255CCover.story-Going.global.doc

http://www.coalage.com/news/latest/3296-south-africa-s-vr-steel-supplies-dragline-bucket-to-north-america.html (http://www.coalage.com/news/latest/3296-south-africa-s-vr-steel-supplies-dragline-bucket-to-north-america.html)

mark100

22-05-2014, 03:35 PM

2 articles in 2 days from Hoey

Austin Engineering’s shares were sold down to the tune of more than 20 per cent after the company announced a substantial earnings downgrade on Wednesday, which it would appear should have been forthcoming well before the sell-off that occurred in recent weeks.

In fact the company’s shares have been unravelling since February, falling from about $3.50 to approximately $1.20, representing a decline of 65 per cent.

With regard to today’s developments, analysts at Argonaut noted revised 2013-14 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance in a range between $15 million and $18 million was substantially short of prior guidance of between $37 million and $41 million.

The engineering company has exposure to the mining sector and while Argonaut noted this development could partly be attributed to timing issues its observation “investors will remain sceptical until a recovery is proven” would have to be an understatement. The size of the underperformance against guidance is hardly something that could not be predicted until six weeks out from end of financial year.

Also leaving a sour taste in the mouths of investors would be the substantial sell-off in the company’s shares that occurred while management, as it informed the ASX following a price query, finally deemed confidentiality may have been lost while it was deliberating over revised profit guidance.

High volume share trading
Trading in the company’s shares in the two weeks leading up to the ASX query, the subsequent trading halt and issue of revised guidance was marked by high volume share trading.

In the 12 business days in May leading up to this point more than 2.3 million shares were traded. On a monthly basis this represents about 4.2 million shares. One has to go back nearly four years to find a month where volumes to that extent were traded.

To seemingly be oblivious that “confidentiality may have been lost” prior to May 19 suggests management was way out of touch with what represented high-volume trading in its stock.

Confidentiality didn’t just vanish in the blink of an eye, it was trashed over a period of weeks along with the company’s share price, and now in the space of three weeks, shareholder value of more than 40 per cent has been wiped off the stock.

Given the timing of their exit, the investment team at Alleron Investment Management obviously smelt a rat, dumping 1.1 million shares and ceasing to be a substantial shareholder on May 15.

These sorts of developments take a long time for companies to shake off, and the management team’s abysmal performance isn’t likely to be forgiven or forgotten. In situations such as this often management has to take a step back for the company to go forwards.

With a stake of more than 20 per cent in Austin Engineering, Bradken will obviously be unimpressed, but it could have been worse if the company had progressed its proposed acquisition announced in December, which was subsequently withdrawn in February.