AUSTRALIA ASB AU Price (at 01:41, 02 Jan 2013 GMT) A$0.58 Volatility index Medium GICS sector Capital Goods Market cap A$m 201 30-day avg turnover A$m 0.3 Number shares on issue m 346.0 Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 652.4 851.3 1,151.3 1,215.1 EBIT m 16.6 40.2 77.5 81.8 Reported profit m 11.0 21.1 45.9 48.9 Adjusted profit m 11.0 20.5 45.9 48.9 Gross cashflow m 27.4 43.7 69.6 73.0 CFPS 11.0 16.6 20.1 21.1 CFPS growth % -26.8 50.5 21.1 4.9 PGCFPS x 5.3 3.5 2.9 2.8 PGCFPS rel x 0.56 0.41 0.38 0.39 EPS adj 4.5 7.1 13.3 14.1 EPS adj growth % -49.6 59.5 86.9 6.5 PER adj x 13.0 8.2 4.4 4.1 PER rel x 0.76 0.53 0.37 0.38 Total DPS 0.0 0.0 0.0 6.0 Total div yield % 0.0 0.0 0.0 10.3 Franking % nmf nmf nmf 100 ROA % 2.2 4.6 8.1 8.1 ROE % 4.0 6.3 11.6 11.3 EV/EBITDA x 9.3 5.7 3.6 3.4 Net debt/equity % 58.0 34.9 26.3 23.0 P/BV x 0.5 0.5 0.5 0.4 ASB AU vs Small Ordinaries Source: FactSet, Macquarie Research, January 2013 (all figures in AUD unless noted) 3 January 2013 Macquarie Securities (Australia) Limited Retail take up 62% Event We update our issued capital for the retail entitlement take up which resulted in 26.1m shares of a possible 42.4m shares being issued. Impact Balance sheet first. We estimate net debt will rise to nearly $130m by year end (from pro-forma levels of $114m) due to bullet payment terms on the Aremiti boat. has sold its luxury stock boat for an undisclosed sum. The sale will lower debt levels and any accounting profits or losses will be excluded from covenant calculations. It also removes a management distraction. Currency and fast ferry market hurting. The high level of the Australian dollar and European recession is hurting s Australian business. We expect Australian yard to essentially break even in FY13 as the Australian Customs fleet contract ramps up. US earnings are key to the future of. We expect FY12 EBIT of $42.2m growing to $72.3m in FY14 driven by the ramping up of work on both of its Navy contracts and improving contract performance on the JHSV contract in particular. Big focus on the future US budget. The near term revenue outlook for the US business remains strong as both the LCS and JHSV programs ramp up. There is a medium term cloud however in the form of potential US budget cuts. Whether s programs get cut or not will come down to their relative cheapness, construction speed and the filling of capability gaps against overall budget demands. We do not foresee a definitive forward budget outcome until after the fiscal cliff debate. The navy has ordered all 10 JHSV s. The JHSV program is expected to deliver annual revenues of A$280m per annum from 2014. was recently awarded its sixth LCS and it s fourth under the 10 ship block buy contract awarded in January 2011. We estimate the total LCS contract will add US$700m to annual revenue by FY15 Earnings and target price revision No change to underlying earnings. FY13 eps up 2.8% to 7.6cps. FY14 eps up 4.6% to 13.3cps. Price catalyst Due to research restrictions, Macquarie cannot advise its valuation on ASB AU at present. Action and recommendation Due to research restrictions, Macquarie cannot advise its recommendation on ASB AU at present. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
Balance sheet first We estimate net debt will rise to nearly $130m by year end (from pro-forma levels of $114m) due to bullet payment terms on the Aremiti boat. This level of net debt assumes no sale of the trimaran stock vessel which has an estimated value of $50-70m. has sold its luxury stock boat for an undisclosed sum. The sale will lower debt levels and any accounting profits or losses will be excluded from covenant calculations. It also removes a management distraction. FY12 net debt was $160.7m due to capex on the US facility and no sale of the stock vessel. We expect capex to fall away in FY13 to $30m post the LCS related expansion. It is important to note that most debt on the face of the balance sheet is Go Zone bonds. These are similar to municipal bonds and have a 30 year life provided credit support continues from s Australian banks. This support is contingent on staying within its covenants for the next three years. Continued support from the banking syndicate is likely to come down to improved earnings, particularly in the US. This is discussed in the section below. Currency and fast ferry market hurting The high level of the Australian dollar and European recession is hurting s Australian business. This has driven s decision to invest in the Philippines market so it can compete more effectively in the small vessel market. We expect Australian yard to essentially break even in FY13 as the Australian Customs fleet contract ramps up. We have assumed the stock vessel sale does not occur in FY13 or FY14. Fig 1 Earnings summary Revenue FY12 FY13 FY14 US 570.3 752.8 1047.9 Other 82.1 98.5 103.4 Total 652.4 851.3 1151.3 EBIT US 33.7 42.2 72.3 Other -17.1-2.0 5.2 Total 16.6 40.2 77.5 Margins US 5.9% 5.6% 6.9% Other -20.8% -2.0% 5.0% Total 2.5% 4.7% 6.7% Source: Company data, Macquarie Research, January 2013 US earnings are key to the future of. We expect FY12 EBIT of $42.2m growing to $72.3m in FY14 driven by the ramping up of work on both of its Navy contracts and improving contract performance on the JHSV contract in particular. 3 January 2013 2
We have detailed s order book below. Fig 2 Order book good in the US, skinny in Australia Division Customer Country Length Delivery Value Stock boat Undisclosed 101m n/a $80m Australia Customs Australia 58m Aug-15 $280m Customs Maintenance Australia 58m Aug-15 $50m Turbine Transfers UK 21m Nov-12 $6m SNC Aremiti Tahiti 80m Oct-13 $43m Westpac Charter $30m Total $489m USA JHSV2 US 103m Dec-12 $175m JHSV3 US 103m Jun-13 $175m JHSV 4&5 US 103m Jun-14 $329m JHSV 6&7 US 103m Jun-15 $313m JHSV 8&9 US 103m Jun-16 $322m LCS4 US 127m Dec-12 $300m LCS6 US 127m Jun-14 $432m LCS8 US 127m Dec-14 $369m LCS 10&12 US 127m Dec-15 $691m LCS modification US Mar-13 $20m JHSV 10 US 103m Jun-17 $167m Total $3,293m Total $3,782m Source:, Macquarie Research, January 2013 was recently formally awarded the $330m Cape Class Patrol Boat contract. $280m relates to the building of 8 new 58m vessels and $50m is an 8 year maintenance agreement. Construction commenced in February 2012 with delivery beginning in March 2013 and ending in August 2015. This win is important as it underwrites a base load of work for the Australian business for the next few years and significantly improves confidence levels in FY13 and FY14 forecasts. Work in hand currently sits at $2.5bn. The above table excludes revenue from the recently formed maintenance division. We expect revenues in this division to be $30m in FY13. The prolonged softness in the core European fast ferry market is causing to focus the Australian yard on defence. This strategy will play to 's strength with the US Navy where it is the lead constructor on 2 large vessel programs. is currently bidding on a number of defence programs which can be built in its Perth yard. The defence sector looks the strongest for, especially in the US (this is discussed more fully in the following section). Given recent piracy issues globally there is also increased focus on patrol type craft. is also branching out into defence systems work following the acquisition of ATI in November 2010. This is witnessed by the joint bid for the ANZAC class frigate communications upgrade. Key issues for We see several key issues for going forward. Delivering as bid margins from the US business. Contract performance on JHSV1 was disappointing and has impacted on the market s belief in the future profitability of the yard. Clarity on the future of the US budget. The size of the future US Defence spend is outside of s hands. We discuss this issue below. Firming up workload for the Australian yard. is working on a number of potential defence contracts for this yard and these are key for its future workload. Successful start up of the Philippines yard. Sale of the stock boat. still has a boat on its books worth potentially $50-70m. A sale of this vessel would be a significant positive for the stock. 3 January 2013 3
Big focus on the future US budget The near term revenue outlook for the US business remains strong as both the LCS and JHSV programs ramp up. There is a medium term cloud however in the form of potential US budget cuts. Whether s programs get cut or not will come down to their relative cheapness, construction speed and the filling of capability gaps against overall budget demands. We do not foresee a definitive forward budget outcome until after the fiscal cliff debate. The navy has ordered all 10 JHSV s. The JHSV program is expected to deliver annual revenues of A$280m per annum from 2014. began construction of JHSV 1 in December 2009. The initial contract was for US$185m for one boat with an option for nine more. This is the usual way the DOD awards contracts as it is illegal to award a contract until the money has been appropriated. Since the budget is annual, only one year contracts can be awarded. The JHSV is essentially a troop and equipment carrying fast ferry. These boats are to be 103m long and be capable of speeds of up to 35 knots over 1,200 nautical miles. They have permanent berths for 150 troops and airline style seats for 312 passengers. In addition, the boats will operate helicopters and have a payload of 635 tonnes. This specification is similar to the Westpac Express which has operated successfully for the US Marines at Okinawa since 2001. LCS progressing as well was recently awarded its sixth LCS and its fourth under the 10 ship block buy contract awarded in January 2011. We estimate the total LCS contract will add US$700m to annual revenue by FY15 The contract structure is fixed price incentive contract (a form of sliding scale incentive-based contract). The US Navy has a long term target of acquiring 50-60 LCS vessels. 3 January 2013 4
Fig 3 Financials Limited (ASB:$0.58) 2-Jan-13 Interim results 2H11(a) 1H12(a) 2H12(a) 1H13(e) Profit & Loss 2012A 2013E 2014E 2015E Revenue 247.5 267.4 384.9 330.7 Revenue $m 652.4 851.3 1151.3 1215.1 EBITDA $m 10.5 2.7 30.2 23.9 EBITDA $m 32.9 63.4 101.1 105.8 Depreciation $m 8.9 6.7 9.6 11.6 Depreciation $m 16.3 23.2 23.6 24.1 Amortisation of goodwill $m 0.0 0.0 0.0 0.0 Amortisation of goodwill $m 0.0 0.0 0.0 0.0 EBIT $m 1.6-4.0 20.6 12.3 EBIT $m 16.6 40.2 77.5 81.8 Net Interest expense $m 1.2 2.3 1.7 5.0 Net interest expense $m 4.0 10.0 9.9 9.9 Pre-Tax Profit $m 0.4-6.3 18.9 7.3 Pre-Tax Profit $m 12.6 30.1 67.5 71.9 Tax Expense $m -7.4-3.3 4.8 2.3 Tax Expense $m 1.5 9.6 21.6 23.0 Net Profit $m 7.8-3.0 14.0 5.0 Net Profit $m 11.0 20.5 45.9 48.9 Outside equity interests $m 0.0 0.0 0.0 0.0 Outside equity interests $m 0.0 0.0 0.0 0.0 Net Abn/Extra $m 0.0 0.0 0.0 0.6 Net Abnormals/Extra. $m 0.0 0.6 0.0 0.0 Reported Earnings $m 7.8-3.0 14.0 5.6 Reported Earnings $m 11.0 21.1 45.9 48.9 Adjusted Earnings $m 7.8-3.0 14.0 5.0 Adjusted Earnings $m 11.0 20.5 45.9 48.9 Gross Cashflow $m 6.7 2.5 31.3 16.6 Gross Cashflow $m 33.7 51.8 81.5 74.4 EPS (Adj/dil) c 4.2-1.6 7.5 2.6 EPS (adj/diluted) c 5.9 7.6 13.3 14.1 EPS growth % -63.9-121.3 79.9-265.8 EPS growth % -0.5 0.3 0.7 0.1 CFPS c 39.2-1.5 19.2 4.4 PE (adj) x 9.9 7.6 4.4 4.1 CFPS Growth % nmf -69.4-51.1 nmf CFPS c 17.6-5.0 14.5 17.3 EBITDA/Sales % 4.2 1.0 7.8 7.2 CFPS Growth % -48.5 nmf nmf 19.4 EBIT/Sales % 0.6-1.5 5.4 3.7 PGCFPS x 3.3 nmf 4.0 3.4 Earnings Split % 35.7-27.1 127.1 24.3 DPS c 0.0 0.0 0.0 6.0 Revenue Growth % -19.7 4.5 55.6 23.6 Yield % 0.0 0.0 0.0 10.3 EBIT Growth % -95.1 nmf 1226.8 nmf Franking % nmf nmf nmf 100.0 Profit and Loss ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E Revenue Growth % 29.6 30.5 35.2 5.5 EBIT Growth % -25.0 142.4 92.8 5.6 Pre-tax Profit $m 12.6 30.1 67.5 71.9 EBITDA/Sales % 5.0 7.4 8.8 8.7 Depreciation & $m 16.3 23.2 23.6 24.1 Amortisation EBIT/Sales % 2.5 4.7 6.7 6.7 Tax Paid $m 4.9-1.5-9.6-21.6 Effective tax rate % 12.1 32.0 32.0 32.0 Gross cashflow $m 33.7 51.8 81.5 74.4 Payout ratio % 0.0 0.0 0.0 42.5 Changes in working $m -14.0-57.6-19.5-13.2 capital EV/EBITA x 16.3 7.1 4.0 3.7 Other $m 13.4-7.5-12.0-1.4 EV/EBITDA x 8.2 4.5 3.1 2.9 Operating Cashflow $m 33.1-13.3 50.0 59.8 EV/Sales x 0.4 0.3 0.3 0.2 Acquisitions $m 0.0 0.0 0.0 0.0 Capex - Plant & Equip. $m -133.3-30.0-30.0-31.7 Balance sheet ratios Asset Sales $m 0.0 0.0 0.0 0.0 ROE % 4.0 6.3 11.6 11.3 Other $m 8.7 0.0 0.0 0.0 ROA % 2.2 4.6 8.1 8.1 Investing cashflow $m -124.6-30.0-30.0-31.7 ROFE % 4.3 8.6 15.0 15.2 Dividend (ordinary) $m -11.3 0.0 0.0-20.8 Net Debt $m 160.7 130.0 109.9 102.6 Equity raised $m 0.0 74.0 0.0 0.0 Net Debt/Equity % Other $m 0.0 0.0 0.0 0.0 58.0 34.9 26.3 23.0 Interest Cover x 4.1 4.0 7.8 8.3 Financing cashflow $m -11.3 74.0 0.0-20.8 Price/NTA x 0.4 0.5 0.5 0.5 NTA per share $ 1.45 1.06 1.19 1.28 Net Change in $m -102.8 30.7 20.0 7.3 cash/debt EFPOWA m 188.1 268.2 346.0 346.0 Historical performance 2009A 2010A 2011A 2012A Balance Sheet 2012A 2013E 2014E 2015E Cash $m 104.8 135.4 155.5 162.8 Revenue $m 474.3 528.3 503.4 652.4 Receivables $m 96.2 125.5 169.7 179.1 EBITDA $m 54.7 64.7 37.6 32.9 Inventories $m 193.5 210.0 226.4 239.0 Depreciation/Amortisatio $m 8.5 12.0 15.5 16.3 Investments $m 0.0 0.0 0.0 0.0 n EBIT $m 46.2 52.7 22.1 16.6 Property, plant & $m 370.4 377.2 383.5 391.1 equipment Net interest expense $m -8.3 1.6 2.3 4.0 Intangibles $m 5.0 5.0 5.0 5.0 Pre-Tax Profit $m 54.5 51.2 19.8 12.6 Other Assets $m 56.1 56.1 56.1 56.1 Tax Expense $m 17.1 14.0-2.1 1.5 Total Assets $m 826.0 909.2 996.3 1033.2 Net Profit $m 37.4 37.1 21.9 11.0 Payables $m 128.6 116.8 157.9 166.7 Net Abn/Extra $m -28.2 0.0 0.0 0.0 Short Term Debt $m 19.0 19.0 19.0 19.0 Long Term Debt $m 246.4 246.4 246.4 246.4 EPS (adj/dil) c 19.9 19.7 11.6 5.9 Other Liabilities $m 154.9 154.9 154.9 154.9 EPS growth % -0.3 0.0-0.4-0.5 Total Liabilities $m 548.9 537.1 578.2 587.0 Ordinary DPS c 6.0 6.0 6.0 0.0 Shareholders Funds $m 277.0 372.1 418.1 446.2 EBITDA/Sales % 11.5 12.2 7.5 5.0 Minority Interests $m 0.0 0.0 0.0 0.0 EBIT/Sales % 9.7 10.0 4.4 2.5 Total Shareholders $m 277.0 372.1 418.1 446.2 Equity ROE % 16.4 14.7 8.1 4.0 ROFE % 56.7 19.3 6.4 4.3 Total Funds employed $m 826.0 909.2 996.3 1,033.2 EFPOWA m 188.1 188.1 188.1 188.1 Divisional Information 2012A 2013E 2014E 2015E Sales 652.4 851.3 1151.3 1215.1-17.1-2.0 5.2 5.4 Oceanfast 0.0 0.0 0.0 0.0 Image 0.0 0.0 0.0 0.0 US 33.7 42.2 72.3 76.4 Corporate 0.0 0.0 0.0 0.0 Total 16.6 40.2 77.5 81.8 Source: Company data, Macquarie Research, January 2013 3 January 2013 5
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 Sept 2012 AU/NZ Asia RSA USA CA EUR Outperform 50.00% 56.85% 61.54% 41.38% 63.19% 44.15% (for US coverage by MCUSA, 7.35% of stocks covered are investment banking clients) Neutral 36.62% 25.14% 27.69% 52.13% 30.77% 30.57% (for US coverage by MCUSA, 9.31% of stocks covered are investment banking clients) Underperform 13.38% 18.02% 10.77% 6.49% 6.04% 25.28% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Company Specific Disclosures: The analyst and/or associated parties own or have other interests in securities issued by ASB. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Ltd's equity securities. The Macquarie Group is acting as joint lead manager and joint underwriter to Ltd in relation to an $86m non-renounceable entitlement offer as announced on 22 November, 2012. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. 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The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 3 January 2013 6