Abigroup pedals the cycle

Despite that, we felt this Sydney-based construction company offered good value to those prepared to ride out the short-term bumps. And there have been a few bumps.

After that review the share price peaked at about $2.60. But then, as we predicted, the half year result disappointed the market and it sent the price tumbling down to $2.00.

Net profit for the six months to 31 December 2001 fell 46% to $3.3m. Disappointing, yes, but such a figure does not warrant throwing oneself off a recently-constructed Abigroup bridge.

Pick-up

This company's bread and butter lies in construction and maintenance contracts and, with a lull in non-residential construction following the Olympics, things have been a little slow. A pick-up, though, is expected in 2003.

The big contract in the wings is the $1.4bn Western Sydney Orbital (WSO) project, with an announcement of the preferred bidder due in the next six months or so.

Abigroup is a player in the consortium that also features Leighton Holdings and Macquarie Bank and, if the bid is successful, it would be a huge boon for the company.

Even if Abigroup fails to win a spot, despite the fact that this may have a negative effect on the share price but would not be of major concern.

That's because the company has been successful in acquiring a number of smaller contracts, including the construction of a number of Mitre 10 mega-hardware stores, that will keep the coffers ticking over.

The asset maintenance division has also been winning contracts to maintain existing infrastructure assets such as gas and water pipe networks. This area continues to grow and is expected to contribute about 20% of revenue in the 2002 financial year.

To the company's problem child. There are plenty of white elephants at Sydney's Olympic Park but the Superdome is perhaps the biggest.

It continues to trade at a loss and with the future of the Superdome-based Sydney Kings basketball team uncertain, the red ink will continue to flow.

But this is a flesh wound and not life threatening. Indeed, if it causes management to think longer about any diversification away from its core business, it may even be a valuable lesson.

We haven't changed our profit expectations for the 2002 financial year but we have revised – read lowered - the level of dividends we expect Abigroup to deliver.

Whilst hoping that last year's 12-cent dividend would be maintained, after the company slashed its first-half dividend from seven cents last year to four cents this year, that clearly won't be the case. We're now expecting a total dividend of eight cents for the year.

Disappointing

That means the shares are trading on a prospective fully-franked dividend yield of 3.4%. While that's not to be sneezed at, given that this stock is in our our income portfolio (see page 16), it's a little disappointing.

Things should pick up in 2003 and even without any major new contracts we'd expect the dividend level to increase over the next couple of years.

The share price is little changed since last issue (Long Term Buy - $2.39) and, despite the troubles at the dome, there's little reason to change our view. Abigroup remains good value. LONG TERM BUY.