Article very positive - as oppose to price sentiment:
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Servicing boom a safer bet Perry Williams Mining and energy contractors may have endured a rocky start to the year after the floods in Queensland, but the massive backlog of work still to come from Australia's mining boom means analysts remain strongly upbeat on the medium-term outlook for the sector. Service companies � which, as the name suggests, provide services to miners � often get overlooked in preference for direct exposure to the mining companies themselves. But analysts argue there are strong benefits to be gained from investing in mining services and engineering companies as most are struggling to keep up with demand for their services in the current climate. Service firms are poised to profit from a cyclical upturn in the resources sector and often represent a less volatile bet than mining companies, which are forced to fork out massive initial capital to initiate long-term projects while seeing their share price affected by commodity price movements in the interim. Lower capital spending means the bulk of service companies have the earnings and reliability of a packed order book to pay a dividend while the sector also tends to be relatively well diversified across a host of commodities rather than being tied to a particular resource. With a boom year expected for most commodities thanks to continued strong demand from China and India, service companies are ideally poised to benefit. Merrill Lynch estimates more than $275 billion of work is still to be awarded over the next three years from the infrastructure, resources and oil and gas sectors. Capital expenditure in liquefied natural gas, coal and iron ore is set to eclipse that of the 2003-08 boom years with annual sector growth of 20 per cent expected for the three commodities over the next five years. Engineering and construction activity alone is tipped to grow to $76 billion over the next 12 months, marking an increase of nearly a third on the 2008 boom. Landmark projects with billions of dollars of contracts still to be awarded to service firms include US oil major Chevron's $US43 billion Gorgon liquefied natural gas project, the largest resource investment in Australia to date; the further expansion of Pilbara iron ore output from global miner Rio Tinto and the Andrew Forrest-led Fortescue Metals Group and a string of work on LNG projects in Queensland. "The outlook for the [mining services] sector is unequivocally strong," UBS resources analyst Martin Byers said. "We expect growth to be buoyed by further ramping up of iron ore production, a recovery in coal production, particularly in the June quarter, and early stages of greenfield expansion activity." The broker expects a 27 per cent lift in earnings per share in 2010 compared with the previous 12 months with earnings profiles over the six months to June 2011 also continuing to look strong. Merrill analysts tout Downer and Transfield Services as their top sector picks due to the companies' significant exposure to the forthcoming capital expenditure cycle, although Downer's troubled Waratah rail project contract will remove some immediate upside. UBS prefers smaller service firms and says investors should look through any near-term valuation concerns. Companies tipped to ride the recovery from the depths of the financial sector in the mining sector include NRW Holdings, which has strong exposure to uplift from the iron ore and coal sectors including lucrative rail work for Fortescue in the Pilbara and Rio Tinto in Africa. Industrea, which derives strong revenues from the coal industry, and Bradken, in its role as provider of operational and capital-related equipment, are also expected to post strong growth in the coming year. Although the headline numbers are impressive, not every service company will be an automatic winner from the return of the resources "super cycle". With order books already bulging at record levels, cost inflation and the availability of skilled labour could lead to capacity constraints as early as this year. But this is likely to have more of an impact on the timing of bidding for new projects rather than any hugely detrimental impact on profits. Returns for the mining services sector in the last 12 months have been in line with the Small Ordinaries Index, according to UBS, up 14 per cent compared with the market's performance of 13 per cent.
Good luck to all and DYOR
IDL Price at posting:
$1.32 Sentiment: Buy Disclosure: Held
