Ausenco (AAX) – Buy

Ausenco appears to be in a strong position to continue the positive earnings momentum it delivered in the second half of 2011. We believe this momentum is likely to be increasingly revenue-driven given the strength of new contract awards so far in 2011 and 2012.

The company has been awarded $130 million worth of new work across four projects in the last week dominated by the Constancia copper project in Peru, which is expected to deliver $100 million in incremental revenue. We estimate Ausenco has been awarded contracts (both announced and unannounced) worth an estimated $212-$257 million in the first three months of this year.

We continue to rate this company as a Buy. It appears to be winning material work in the higher margin segment of the key growth regions of South America, Africa and North America. On the assumption it can execute these contracts well, and deliver sufficient staff numbers, we consider the company well positioned to deliver a strong result in fiscal 2012.

• 12-month target price: $5.03 (unchanged)
• Wednesday’s closing price: $4.40

Gerard Lighting Corp (GLG) – Buy

We are initiating coverage of Gerard Lighting with a Buy rating. Cyclical factors are likely to create substantial headwinds for Gerard over the remainder of this financial year and into the first half of FY2013. Yet the transition to higher margin intelligent lighting products (ILP) is seeing Gerard outperform sector growth rates. Valuation at the bottom of the cycle is undemanding at 5.1-times full-year 2012 earnings before interest, tax, depreciation and amortisation (EBITDA), which is a 35% discount to its small-cap peer group.

The company has some aggressive growth targets. Management are targeting sales of $700 million and earnings before interest and tax (EBIT) of $70 million by 2016. To achieve this, they would require a continued transition to ILP products (we estimate $10-15 million EBITDA upside) and further acquisitions (GLG have acquired four businesses for $16 million since listing). Our forecasts are well below the target and, if achieved, suggest considerable upside from current share price levels.

• 12-month target price: $1.20
• Wednesday’s closing price: $0.74

Cabral Resources (CBS) – Speculative Buy

Cabral Resources represents an early-stage investment opportunity ahead of initial drilling results, metallurgical test work and subsequent de-risking milestones, including a maiden resource estimate for its Morro do Gergelim project in Bahia State, Brazil in the third quarter. Cabral is differentiated among its peers by a strategic foothold in Bahia State. With possible access to government-funded rail and port infrastructure, the company is well positioned to unlock a significant location advantage in an emerging iron ore province. It had cash of $14.6 million at December 21, 2011.

It is fully funded to commence an initial 3,000m drilling programme at its 100%-owned Morro do Gergelim project and is awaiting final environmental approval for drilling. It plans to deploy two diamond drill rigs in mid-April for a 32-hole programme targeting 331Mt-644Mt of magnetite at Morro do Gergelim. Environmental approval is expected imminently.

• 12-month target price: $0.27
• Wednesday’s closing price: $0.086
• Risk: Speculative

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