2Q slightly weaker QoQ. We recently caught up with AusGroup Ltd (AusGroup) management. The group had posted A$130.1m in 2QFY09 revenue, up 15% YoY and about 0.3% lower QoQ. Net profit came in at almost A$5m, 30.6% lower YoY and 13.9% lower QoQ. The results were slightly weaker on a QoQ basis - gross margin slipped to 11.8% this quarter from 12.8% in 1Q09, while net margin hit 3.8% versus 4.4% achieved a quarter ago. Its 2Q results exceeded our estimates because of a delayed impact of market shrinkage on ongoing projects and some flow through of conservative variation claims from previous quarters.

Revenue and margin pressure. While we have adjusted our estimates slightly to take the 2Q figures into account, we still expect significant contractions in 2H09. Our 2H09F revenue estimate is only 60% of the 1H09 figure, as the company feels the impact of a shrinking order book and slowing project wins. The group said its order book stood at A$168m as at 31 Dec 2008, versus A$297m at end FY08 (year-end: June). The global financial and economic crises are impacting planned capex in both the minerals resources and oil & gas industries. AusGroup has already fallen victim to an order termination and an order suspension - impacting 2H revenue. Apart from top line pressure, our key concern is the effect on margins as AusGroup competes for a significantly smaller pie.

Strategic realignment towards quality of revenue. We have previously commented on AusGroup's growing pains since FY08 as it transformed itself into a multinational and multiplatform business. The company is finally showing some signs of "growing up", in our view. Its business strategy is now aligned towards quality of revenue, not quantity. Meanwhile, project management and execution also seem to have improved. The implementation of a process driven approach is evident in the quality of disclosure for its 1H results. The new focus on execution and revenue quality is essential in a low margin environment.

Waiting and watching. We stay cautious on revenue and margin estimates and will track the company closely in the months ahead. We maintain our HOLD rating on AusGroup. AusGroup's performance in 2H09, its ability to secure new orders, and further clarity on its business environment will affect our rating. Our new fair value estimate is S$0.16 or 4x FY09F earnings (prev: S$0.17).