Abigroup's road rising

Way back in issue 75/Mar 01 (Long Term Buy - $1.83), we published an article titled 'Abigroup's forgotten value'. In our view, what has occurred between then and now is an almost textbook case of successful value investing.

We humbly suggest that the article, available on our website, is well worth re-reading, especially if you own Abigroup stock. The reason for that is that the optimism we felt then, and the price at which we could buy in, is very different from where we stand now.

Downgrading

Two years ago Abigroup enjoyed a full order book and was cheap. Now it is less so. Having achieved a healthy 59% increase since the time of that full review, we're downgrading and this review will explain why.

The construction business is a tough game and recent experience at Abigroup bears this out. After a few bumper years either side of the Sydney Olympics, the 2002 financial year was something of a shocker and the 2003 financial year doesn't look like being much better.

In late 2002, Abigroup was riding high after being part of a consortium that secured one of the largest road construction contracts in Australia's road building history: the $1.5bn Western Sydney Orbital (WSO).

It helped to entrench the company as one of the leading civil constructors in the country.

But this wasn't enough to get Abigroup on the short list to build the $900m Lane Cove tunnel. As a consequence, it had to write off $5-7m in expenses related to the bid. This, combined with the delayed receipt of revenues on existing projects such as the WSO, has forced the company to announce a 15-20% profit downgrade for the 2003 financial year.

Still, with some $1.8bn worth of work on the books for 2004 and over $3bn in road construction contracts up for grabs, next year and beyond looks like being a lot better.

And road building is not Abigroup's only forte - it's a leader in residential and commercial construction too, with $200m in contracts in NSW alone in the 2003 financial year.

The company has also been attempting to reduce its reliance on construction by moving into asset maintenance, principally the maintenance of gas and water pipeline networks. Indeed, Energex has recently renewed a three-year $20m contract.

Dividend doubts

The Sydney Superdome, though, continues to rack up losses and there's little hope of this problem asset being sold quickly on favourable terms. Abigroup may well be stuck with it for a while yet.

So the result for the 2003 financial year is likely to be a lot lower than we anticipated and we're also not confident that last year's eight-cent dividend will be increased this year. That's not great news, especially as Abigroup is part of our income portfolio.

As we've said, though, the outlook for 2004 and beyond looks more promising. But with a big share price rise – the stock is up 19% since we last reviewed it in issue 128/May 2003 (Long Term Buy - $2.45) – we think a downgrade is in order. There are cheaper stocks on offer for new investors but current shareholders should HOLD FOR THE UPSIDE.