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This Week’s Falling Knife: AusGroup

oilwellThis week’s “Falling Knife” spotlight falls on AusGroup (SGX: 5GJ), which has plunged almost 14% after reporting third-quarter numbers.

Nearly S$32m has been wiped off the value of the mining and oil & gas services outfit, which is headquartered in Perth, Australia. The company said profits in the third quarter slumped from A$6.8m (S$76m) to just A$0.1m (S$0.1m). Revenues fell from A$182m (S$224m) to A$138m (S$170m).

AusGroup, which makes pipes and scaffolding for the natural resources industry, assured investors that the outlook for the Australian oil, gas, coal and iron ore continues to be positive. However, it confessed that the downturn in the commodities market has meant that a number of projects have been delayed.

AusGroup added that it has orders of A$215 (S$265m) in hand, which, based on last year’s annual sales, is equivalent to around three months of work.

AusGroup’s business is exposed to a highly cyclical industry – natural resources. It enjoyed the boom in Australian commodities as annual revenues surged from S$44m in 2002 to over S$800m last year. That works out at an average annual increase of 33% a year for ten years.

However, there are signs that the commodity supercycle may be showing signs of tiredness. From around 2000, commodity prices started to rise, which in turn led to a response by resources companies to ramp up production. However, prices have been coming off the boil for a while.

Thing with commodities is that it can take a long time for production to come on stream. But as soon as it does, it can stay for a very long time. That makes life difficult for AusGroup that has to compete for a slice of an increasingly shrinking support-services pie. Things will get better but that could be some time away.

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