It was not a great interim reporting season for the mining services companies, with profits slumping as their customers – the big mining groups – reined-in their activity and took a scalpel to their cost bases.
But as is usually the case after a sector is hammered, value has started to emerge in some of the stocks.
The picks of the bunch
Sadly for shareholders of sector darling Monadelphous (MND), on value grounds it is paying the price for holding up very strongly in its interim result. Monadelphous reported revenue down just 1%, to $1.28 billion, and net profit up 10%, to a record $87.1 million.
However, Monadelphous shareholders can console themselves with a prospective FY14 fully franked dividend yield of 7.4%, easing to 6.8% on the expected FY15 dividend of 112.7 cents. That FY14 yield equates for an SMSF in accumulation phase to a pre-tax yield of 9%, while for a fund paying a pension, it is effectively the same as 10.6%.
The emerging value in the sector could actually be seen in some of the outlook statements accompanying the FY14 interim results: although the remainder of the financial year FY14 will, for most, be a tough slog, some of the service providers saw light at the end of the tunnel, as miners moved from the construction phase to production.
Macmahon Holdings (MAH) gave the most detail on this: it said mining production in Australia had increased and was forecast to continue to rise at a steady pace, with growth averaging 3.8% per year over the next five years.
“Market analysts anticipate that from 2014/15, the combination of strengthening commodity prices and rising production volumes will see the overall size of the contract mining market rise to a peak of $13.4 billion in 2017. If this eventuates, it will certainly provide a positive outlook for the company,” said Macmahon.
Contract mining, construction, crushing and screening provider Maca (MLD) – which reported an excellent interim result, lifting revenue by 47% to $304.6 million, and net profit by 44% to a record $32.6 million – pointed out that its earnings were “closely aligned with quality mid-tier miners that have successfully moved from the construction phase to production, and have further plans to grow.”
Maca, in fact, belies its strong result by still trading below fair value, according to the consensus forecasts: its analysts see it trading at $2.69, still 8% away from its current level of $2.48 – and with a fully franked FY14 prospective yield of 4.4% to sweeten its case.
Emeco (EHL) said it was “seeing miners move away from the austerity phase, towards moving ore volumes at a rate more in line with their mine plans.”
Bradken (BKN) said that since June 2013, it had seen “order intake levels strengthen” for all of its consumable product ranges; that mine production levels were continuing to increase; and it expected sales to “improve through the second half.”
The outlook
Consensus target price forecasts of the analysts who follow the mining services stocks are also indicating further value to be found in some of the sector. Here are the forecasts for the main players.
- Drilling contractor Ausdrill (ASL): Consensus expects 14.6 cents EPS, versus 29.6 cents in FY13. Consensus target price $1.12 – implied gain of 28% on current price of 88 cents.
- Global engineering, procurement, construction management, and operations service provider Ausenco (AAX): Consensus expects 8.9 cents EPS, versus a loss of 25 cents in FY13. Consensus target price 68 cents – implied gain of 13% on current price of 60 cents.
- Mining equipment and consumables supplier Bradken (BKN): Consensus expects 43.4 cents EPS, versus 39.6 cents in FY13. Consensus target price $5.15 – implied gain of 20% on current price of $4.28.
- Earthmoving equipment provider Emeco (EHL): Consensus expects a loss of 1.7 cents EPS, versus 1 cent in FY13. Consensus target price 31 cents – implied gain of 24% on current price of 25 cents.
- Contract miner Macmahon Holdings (MAH): Consensus expects 3 cents EPS, versus a loss of 3 cents in FY13. Consensus target price 21 cents – implied gain of 75% on current price of 12 cents.
- Coal sector mining services provider Mastermyne (MYE): Consensus expects 17 cents EPS, versus 20 cents in FY13. Consensus target price $1.35 – implied gain of 137% on current price of 57 cents.
- Coal sector specialist Sedgman (SDM): Consensus expects 1.4 cents EPS, versus 4.3 cents in FY13. Consensus target price 69 cents – implied gain of 34% on current price of 51.5 cents.
- WA-based civil and mining contractor NRW Holdings (NWH): Consensus expects 20.5 cents EPS, versus 26.6 cents in FY13. Consensus target price $1.50 – implied gain of 34% on current price of $1.12.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Penny Pryor – Art for money’s sake [1]
- Charlie Aitken – JB Hi-Fi best discretionary retail pick [2]
- Staff Reporter – Buy, Sell, Hold – what the brokers say [3]
- Ron Bewley – Know your objectives when building a portfolio [4]
- Tony Negline – How to fix a problem in your SMSF [5]
- Question of the week – SMSF versus industry funds [6]