Austin Engineering takeover offer from Bradken still below the mark

Brisbane-based Austin Engineering (ASX: ANG) received a takeover offer from Bradken (ASX: BKN) this week. Austin Engineering manufactures heavy equipment vehicles for mining and civil infrastructure, as well as providing repair and support services. Bradken is a global manufacturer and supplier of consumable and capital products to the resources and freight rail industries and already controls a 21.5% shareholding in Austin Engineering. Its offer values the takeover target at around $300 million, a premium to the current $229 million market capitalisation.

Austin Engineering responded by saying: “The Board’s initial view is that there is potentially benefit in combining the companies, but believes the proposal undervalues Austin. Accordingly, the Board has indicated a willingness to engage in exploratory discussions with Bradken in relation to its proposal.”

The timing of the takeover offer is at a period when mining expansion and greenfield projects are being cut back, but production is up in both iron ore and coal. Austin had NPAT of $28.4 million in 2013, roughly in line with 2012, on total revenue of $288 million. It has about 30% of revenue coming from overseas – predominantly from the Americas, so the domestic mining downturn can be offset by growth in areas like Chile, Peru and Wyoming.

Over the past five years it grew earnings from $11.54 million to $28.44 million. It has moderate gross gearing and a book value of $2.10. In March it hit a high of almost $6 a share, but closed yesterday at $3.13.

The company acknowledged the subdued mining industry conditions, but did note that with miners ramping up production, they will generally wear out equipment and vehicles faster. This may bring forward service and maintenance needs, in addition to eventual replacement.

Foolish takeaway

Since late 2012 mining has been coming off a high driven by Chinese buying of both iron ore and coal. So conditions are returning to a lower, yet more stable base for the time being. The China story hasn’t gone away in that time and they will still need to build more infrastructure for the millions of citizens expected to move to urban areas over the next 20 years. Just as Bradken can see opportunities in acquisition, investors should also be running the rule over stocks in the sector to see where the value really lies still.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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