Record or near record oil and gold prices suggest the commodities cycle is still far from running out of steam, which means the old adage of looking at stocks that supply shovels to miners remains an attractive way of playing the resources sector.
Intersuisse has used such an approach in recommending Austin Engineering (ANG) as an Accumulate at current levels given the group's strong project pipeline and opportunities to grow the business.
The company designs, manufactures and services equipment for the mining, oil and gas and industrial sectors including items such as excavator buckets, dump truck bodies, mineral processing equipment and parts for aluminium smelters.
It has a national presence in the Australian market with its largest exposures in Queensland and Western Australia, meaning it is well situated to capitalise on the strong mining sectors in both states. There is also a joint venture based in Oman offering some international exposure, the broker suggesting this also offers some growth potential given scope to expand into markets such as Qatar and the United Arab Emirates. Acquisitions are also expected, with management indicating an interest in expanding into raw material sourcing.
Adding to the attraction of the stock in the broker's view is its competitive advantages over rivals, including scale efficiencies, strong relationships with the company's blue-chip client base, continued product innovation and the automation of its processes, which was internally developed.
About 30-40% of group revenues are from product replacement and maintenance work, with the broker expecting this to increase to around 50% in coming years. One advantage this offers is such work is booked well in advance, making it easier for management to predict future earnings.
The broker sees solid growth in coming years, with FY07's return on capital of 20% a good guide as to the sort of returns expected in coming years. It forecasts EPS (earnings per share) will come in at 16.1c in FY08 and 18.5c in FY09, compared to 11.7c in FY07. This puts the stock on a P/E (price to earnings ratio) of 14.9x in FY08 and 13x in FY09 at a price of $2.40.
Yield is not so attractive as the company paid out just 4c per share in FY07 though the broker anticipates this increasing to 6c in FY08 and 8c in FY09, which equates to a FY09 yield of a little over 3%.
Short-term the stronger Australian dollar should actually prove to be a benefit as it reduces the cost of raw materials the company imports, though longer-term the broker notes it would be a problem if the overseas operations grow their contribution to overall earnings as expected.
With a market capitalisation of just over $111m at current prices the stock receives little coverage, the FNArena database showing none of the major brokers or equity researchers cover the company.
Shares in Austin Engineering today are slightly weaker along with the broader market and as at 11.20am were down 6c at $2.39.