Whilst we wait for b.head's graphs i knocked-up a spiel re MS...

Whilst we wait for b.head's graphs i knocked-up a spiel re MS sector.

ASL is a company that does a range of work in MS sector eg. drilling, sell components, manufacture rigs, UG mining service, drill&blast, hire of mining equipment, drills for water etc. Has grown employee numbers considerably over the years but what's happened with SP?

SP is back to where it was 8 years ago. 2 yrs ago SP over $4.00 and was $3.00 12 months ago. Now sits around $1.00 mark. So what happened? Simple short summary is that after warding-off a TO from MAH, ASL went from a modest size company drilling for water and drill&blast in WA to growing rapidly by acquisition and raising capital to enter new fields/sectors in Aus and West Africa.

The SP is back to a fraction of 2 yrs ago coz: massive demand from mining boom is over, company issued too many shares and raised too much debt, margins for work performed has shrunk. ASL have no control over commodity prices and if mines suffer from poor/zero profits then ASL is affected. Fortunately IO industry has kept growing but even there margins are being squeezed tightly. Net result is a series of profit downgrades from ASL with latest indicating about 40m for FY14.

I use this example to illustrate that many MS firms expanded right into/at peak of mining boom and the hey days are gone. I can't foresee profit levels from 2 yrs ago returning even if commodity prices eg gold, coal, base metals etc stop falling and turn around by 10-15%. Hence, in MS sector i reckon past performance is not a reliable indicator of future performance as macro is terrible, competition intense, and few firms have a competitive advantage. Plus MS sector is vulnerable to a further drop in commodity prices and IO in particular.

I'm being ultra cautious and very stk specific before electing to invest into MS sector. ROE and margins are not going back to the good ol days. Even a PE of 8-9 looks expensive imo.