Abigroup on the right road

Construction companies like Abigroup enjoyed a bonanza but have since had to endure a post-Olympic hangover. The Sydney Superdome entertainment venue, for example, sits mostly vacant in a precinct which now feels like a ghost town.

A low Aussie dollar and terrorism fears have led to the cancellations of a number of major international acts (although, alas, that still hasn't kept Cliff Richard away).

Tough year

Things were tough when we last reviewed Abigroup in issue 105/June 02  (Long Term Buy - $2.38). Back then we highlighted the difficult year the construction sector experienced and the effect this would have on Abigroup's profits for the 2002 financial year.

Our fears were confirmed with a 22% fall in revenue and a 15.4% fall in profit for the year to 30 June 2002.

To make matters worse, shareholders had to wear a 42% cut in dividend from 12 to eight cents per share. This is a real worry for a stock usually associated with income. The main culprits were slower construction activity as well as the poor performance from the Superdome.

What the venue really needs is more than occasional one-off events. The loss of the Sydney Kings' home games to the Entertainment Centre hasn't helped and, unlike the basketball team, the Superdome isn't expected to improve on last year's performance.

But here's the good news.

In issue 105 we mentioned that Abigroup (in a joint venture with Leighton Holdings ) was in the running for the $1.5bn Western Sydney Orbital contract.

Last month the company announced that Westlink Motorway Ltd (a 50/50 joint venture owned by Abigroup and Leighton Holdings) was the preferred tender for the contract.

The $750m in revenue from this massive project will be spread over the next five years. In addition, Westlink will have a 34-year maintenance contract, which will give the company some welcome extra pocket money.

This win, along with the recently completed $280m contract to build a 28km dual carriage way in northern NSW, is proof that Abigroup has enough punch to win its fair share of the big contracts.

There are a few other odds and ends to this company which, if not exactly company makers, are at least a buffer should any of its major projects turn sour.

Confident

The Asset Services division maintains existing infrastructure assets such as roads, gas and water pipe networks.

It's not a huge contributor but it has steadily increased its share of total profits from 11% in 2001 to 14% in 2002. This minnow division could really turn a penny if it's successful in winning a number of contracts to maintain water and gas pipe networks in Australia and New Zealand.

In spite of the bad year, management is confident the company will show an improvement. On top of the existing work, Abigroup is tendering for about $3bn in construction and maintenance contracts for 2003.

So, with more work on the books the company is expecting a return to revenue and profit growth next year. And that's before any revenue from the Orbital contract kicks in.

We're also hoping for an increase in the dividend, especially since the stock remains part of our income portfolio. We're happy to stick with LONG TERM BUY.