Mining Equipment Replacement Cycles Will Drive Strong Long Term Upside Potential

Catalysts

About Austin Engineering

Austin Engineering designs and manufactures high performance truck trays, buckets and wear solutions for mining customers globally.

What are the underlying business or industry changes driving this perspective?

• Accelerating production growth across key commodities is driving higher replacement volumes for Austin's trays and buckets, which typically require renewal every three to six years. This underpins structurally growing revenue and more resilient earnings through cycles.
• Expansion of North American capacity, including new leased facilities and Canadian subcontracting that avoids tariff impacts, positions Austin to capture outsized share in a pro mining regulatory environment. This lifts medium term revenue and improves operating leverage.
• Global rollout of the Austin Way, lean manufacturing disciplines and centralized systems is already lifting margins toward 15 percent and is expected to further enhance productivity. This supports sustained net margin expansion and higher return on equity.
• Product leadership in lightweight HPT trays and the austIQ monitoring platform is aligning Austin with miners' push for higher payloads, lower costs and better sustainability outcomes. This is driving mix upgrades, premium pricing and stronger EBITDA margins.
• Strengthened leadership in the Americas and the operational turnaround of Chile, combined with the potential to enter adjacent markets such as Brazil and further African mines, is expected to convert the current working capital investment into higher throughput, improved cash conversion and growing earnings over the next several years.

Assumptions

This narrative explores a more optimistic perspective on Austin Engineering compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Austin Engineering's revenue will grow by 4.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.0% today to 9.1% in 3 years time.
• The bullish analysts expect earnings to reach A$38.7 million (and earnings per share of A$0.06) by about December 2028, up from A$26.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 4.6x today. This future PE is lower than the current PE for the AU Machinery industry at 17.0x.
• The bullish analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained operational underperformance in Chile and wider South America, including continued labor and steel productivity issues and overreliance on subcontractors, could delay the planned turnaround in that region and structurally cap group profitability and earnings growth over the long term, weighing on net margins and return on equity.
• Ongoing working capital intensity driven by bulk steel purchasing, elevated inventories and lumpy OEM and mining orders may keep cash conversion structurally low, forcing higher net debt and limiting the company’s ability to fund expansion or withstand downturns. This would pressure free cash flow and ultimately earnings quality.
• Overexposure to a small number of large OEM and major mining customers, particularly in Chile and North America, increases the risk that contract renegotiations, termination for convenience clauses or a shift to competing tray and bucket suppliers could erode pricing power and volumes over time, negatively impacting revenue growth and EBITDA margins.
• Execution risk around rapid capacity expansions in North America and future geographic growth into regions such as Brazil and Africa may lead to cost overruns, integration challenges and underutilized facilities. This would dilute the benefits of operating leverage and compress group net margins and earnings.
• Long term shifts in commodity demand, global mining investment cycles and regulatory or political changes in key jurisdictions such as North America, Chile and broader South America could reduce production growth and fleet renewal rates. This would weaken the replacement cycle that underpins Austin’s structural growth thesis and directly impact revenue, margins and earnings sustainability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Austin Engineering is A$0.6, which represents up to two standard deviations above the consensus price target of A$0.45. This valuation is based on what can be assumed as the expectations of Austin Engineering's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.6, and the most bearish reporting a price target of just A$0.3.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be A$424.4 million, earnings will come to A$38.7 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of A$0.2, the analyst price target of A$0.6 is 67.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.