ASX Microcaps with a blue-chip profile: Austin Engineering

The world's biggest central banks are set to reverse a record string of rate hikes and stocks towards the small end of town are widely expected to benefit. In this series, we're going to take a deep dive into profitable microcaps with unique businesses, strong balance sheets and a positive outlook.

Austin Engineering (ASX: ANG) specialises in the design, manufacturing and maintenance of equipment for mining, resources and construction sectors. The company describes itself as a "market leader in the design and manufacture of loading and hauling solutions" and services major companies such as Rio Tinto, Newmont and BHP.

Austin Engineering at a glance

• What do they do: A broad range of end-to-end engineering and manufacturing solutions for resources and industrial sectors. The company operates across three major regions (1H24 revenue contribution in brackets): Asia-Pacific (53.7%), North America (29.2%) and South America (17.1%).

• Management: David Singleton has been the Chief Executive since April 2019. He was formerly the Chief Executive of mineral explorer, Poseidon Nickel. He beneficially owns 318,000 shares and 42.9 million options.

• Market cap: $290 million

• Cash on hand: $20.9 million

• Shares on issue: 586 million

• Share price performance: Up 48% year-to-date and 29% in the past twelve months

Austin Engineering 12-month price chart (Source: Market Index)

The Latest Results

Austin's first-half FY24 results (announced 27 February) delivered growth across all key metrics, including:

• Revenue up 26% to $143.6 million

• Net profit after tax up 280% to $15 million

• Operating cash flow of $6.9 million

• Net debt of $11.4 million and on-track to be debt-free in FY24

• Order book up 16% to $184 million

• Reinstated interim dividend of 0.4 cents per share

Five Interesting Takeaways

1. Efficiency amid volatile earnings: Austin reported volatile earnings over the past few years (FY23: $2.85m, FY22: $16.8m and FY21 -$0.5m) due to one off costs and volatile commodity markets. In 2021, the company kicked off the 'Austin 2.0' strategy to improve business competition (cost-cutting, streamline operations etc.) and new product innovation. "In the first half of the year, we’ve seen initiatives put in place under our Austin 2.0 strategy really reset the operational efficiency of the Company and deliver strong financial and operational results, particularly in regard to revenue generation and margin improvement," Singleton said in the company's results announcement. He also added that "we’ve overcome labour scarcity issues in Australia and the USA through upgrading manufacturing systems, automation, and capacity in all of our facilities globally."

2. Topping guidance: On 22 January 2024, Austin upgraded its first-half FY24 guidance to $12-14 million (from $10-12 million). Come February reporting season, it delivered $15 million. This represents a 15% beat against the upgraded guidance and 36% ahead of the original guidance.

3. Recurring revenues: The company's first-half FY24 results presentations says 56% of revenue is recurring, 33% is from repeat customers and 11% from 'other'.

4. Order book: Austin's order book has been growing at a compound average growth rate of 31% since FY21. It's currently sitting at a record $184 million and the company believes this "suggests strong revenue through 2H24 into FY25.

5. Outlook: Austin guided to FY24 revenue between $310-330 million, up 24% on FY23 as well as net profit between $31-33 million, up 75% from FY23. "Market feedback from across Austin’s business units remains positive particularly for the energy and hard rock sectors, led by iron ore. There is moderate weakness in battery commodities, although Austin has minimal exposure to these commodity groups," the company said in its 1H24 results.

Commodity volatility

Shaw and Partners was Buy rated on the stock with a 50 cent target price as of 28 February 2024.

"ANG is a very well-run company delivering impressive results under a revised strategy. Its EBITDA margins materially improved in only 12 months, particularly in North and South America, and the near-term outlook for mining production volumes appears solid," analysts led by Philip Pepe wrote.

"We are, however, conscious of the potential volatility in certain commodity prices and have factored this into our forecasts. Offsetting this, synergies from the recent Mainetec acquisition offer some potential upside."

An Extended Chart

Austin has a relatively constructive price chart, with cycles of consolidation followed by breakouts and more consolidation. The stock is pretty extended, up 17% in the past month and almost 50% year-to-date. Given the strong run up and recent rejection of the 50 cent level – the path of least resistance might be more consolidation.

Austin Engineering chart (Source: TradingView)

Disclaimer – The author does not own any shares in Austin Engineering. Market Index is not affiliated with any of these companies. The information provided in this article is for educational purposes only. It is not intended to be a substitute for professional advice or recommendations. Always conduct your own research and consult with a qualified processional before making any decisions.