Those exposed to the Queensland coal sector and oil and gas activity also look safer: subsea repair specialist Neptune Marine Services on Tuesday declared it was "not presently experiencing a significant material impact".
and the whole article.........
Reality bites for sprawling services sector Tim Boreham | January 31, 2009 Article from: The Australian
LONG after the bull market evaporated, some were still saying suppliers to the resources industry would fare better than the miners.
The thesis went that most mines would keep chugging along, perhaps even boosting production to offset softer commodity prices, and thus requiring goods and services.
Now, reality has bitten hard for a sprawling but ill-defined sector that attracted weightier market valuations than the miners themselves. Companies that professed rude health only a month or two ago are revealing the true nature of supposedly rock-solid contracts, which in reality allow the client to walk away without penalty.
"There was an argument that if prices fall, volumes pick up," says Bell Potter analyst John O'Shea. "But then the Chinese stopped taking volume post-Olympics and the equation went out the window."
Among the downgrades, engineer and supplier Industrea this month cut its earnings forecast by 23 per cent, after client Xstrata closed its Handlebar Hill lead and zinc mine near Mt Isa.
Engineering contractor Macmahon Holdings in late December warned of a "material impact" to results because of "lower than anticipated tendering activity" and a number of clients deferring projects.
In December, Utah-based Boart Longyear, the giant of global drilling, pared expected earnings growth to 18 per cent from 22 per cent and slashed 500 jobs.
Housing providers Fleetwood Corp and Mac Services were both stung by Rio and its Alcan arm's decision to curtail expansion in the Pilbara and Queensland.
Sensing further trouble, Deutsche's analysts this week downgraded earnings expectations for five of the biggest mining services and infrastructure stocks: Leighton Holdings, WorleyParsons, United Group, Downer EDI and Transfield Services.
Deutsche analyst Sameer Chopra expects overall Australian resources capital expenditure to tumble to $19.2 billion from last year's $34.9 billion peak.
Contract mining revenues are tipped to decline to $5 billion from $5.6 billion in 2007-08.
Like a non-compliant orebody, the mining services sector has never been properly defined.
But at least 35 companies fall under the banner, encompassing activities such as engineering, drilling services, assaying and metallurgy, heavy equipment such as trucks and crawler cranes, explosives and portable accommodation.
While most are 100 per cent exposed to the resources sector, others such as United Group, Skilled Group and explosives maker Orica derive a material chunk of earnings from the sector.
According to O'Shea, the sector 12 months ago was trading on average price-earnings (PE) multiples in the high teens, but valuations have been "smashed" to PEs of five or less. Pipeline maker WDS is trading on two times 2008-09 earnings, despite exposure to the still-buoyant Queensland coal seam gas sector.
In retrospect, private equity rang the bell in April 2007 when it floated driller Boart Longyear to an insipid reception from investors.
Boart shares have led the sector's dramatic price decline, falling from its $1.85 listing price to a lowly 19c.
It's a moot point whether the contraction in valuations -- still largely driven by fear of the unknown rather than actual contract losses -- is an overreaction or totally justified.
Foster Stockbroking analyst Dominic Rose fears that companies providing equipment and labour -- but few other value-added services -- will be crunched.
"Our view is it is hard to get excited about mining service companies, even though they are trading on PEs of two, three or four times," he says. "With big miners reducing capital expenditure, they are finding themselves in an increasingly competitive climate when it comes to pitching for work."
O'Shea argues there's value in the sector but it's a matter of nutting out where the stocks are in the food chain.
Those exposed to the exploration end -- such as drillers -- are vulnerable, but those leveraged to bulk commodities (such as BHP Billiton's iron ore output) are in a safer league.
Those exposed to the Queensland coal sector and oil and gas activity also look safer: subsea repair specialist Neptune Marine Services on Tuesday declared it was "not presently experiencing a significant material impact".
O'Shea says there's also an argument in favour of those weighted to consumables rather than capital equipment. An example is Bradken, which makes products such as buckets, crawlers shoes and mill liners.
Companies with single-commodity or single-company exposures are more vulnerable. Take NRW Holdings (engineering services and equipment hire), which is weighted to Fortescue and Rio Tinto's iron ore operations. NRW was affected by Fortescue's cancellation of its Cloudbreak to Christmas Creek rail line in the Pilbara, but so far is sticking with profit guidance.
The niche players are hardly immune, either. Market darling Ammtec, a metallurgical tester, this week fessed up to "lower than anticipated" first-half results.
NMS Price at posting:
12.9¢ Sentiment: Buy Disclosure: Held
