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The ASX200 stock that’s promising ~40% profit growth in FY20

The Ausdrill Limited (ASX: ASL) share price surged higher on Thursday but it couldn’t break above its 14-month high despite beating its own profit guidance.

But shareholders should still be pleased with the ASL share price jumping 7.7% to $1.88 even though it couldn’t hold today’s high of $2.04 a share, which would have been it’s best close since June 2018.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index ended on a whimper with a 0.1% gain, while fellow mining engineering groups like the Decmil Group Limited (ASX: DCG) share price and Monadelphous Group Limited (ASX: MND) share price also outperformed the broader market.

Profit jumps on acquisition

Ausdrill, now renamed Perenti Global, posted a 14.2% increase in FY19 proforma revenue to $1.97 billion as net profit before amortisation of acquired intangibles (NPATA) more than doubled to $103.1 million, which is 5% ahead of management’s guidance.

The big jump in earnings is due largely to its acquisition of underground mining contractor, Barminco, but the increase in top and bottom line hasn’t come at the expense of margins.

What will also please investors is its strong cash conversion of 89% as contract engineering groups can sometimes have trouble turning reported profit into cash.

This helped fund the increase in its final dividend to 3.5 cents from FY18’s 1.5 cents a share (although it did also pay a special dividend last year of 2 cents a share). While the net result may be the same, having only a regular final dividend means management must be confident that it can sustain the payment going forward.

Big FY20 outlook

Management is also painting a positive outlook for the group as it highlighted the $7 billion order book and is forecasting FY20 NPATA of around $140 million – a circa 36% increase over the last financial year.

You won’t find many companies with such a big double-digit growth forecast for FY20, especially in this environment where brokers are trimming their earnings expectations for the current financial year.

The ASL share price isn’t expensive either despite today’s big rise, which gives the stock a one-year gain of around 13% when the ASX 200 is up by less than 3%. Perenti is trading on a trailing price-earnings (P/E) of 10 times based on its adjusted proforma number and is on a yield of a little over 5% (if franking is included).

If the group achieves its FY20 profit forecasts, the P/E could drop to under 7 times. You never want to pay too much for a mining contractor given the lack of earnings visibility and the volatility in its income from year-to-year, but on these numbers, the risk-reward equation looks attractive.

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Motley Fool contributor Brendon Lau owns shares of Decmil Group Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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