Mining services company Southern Cross Electrical Engineering Ltd (ASX: SXE) has dropped heavily today following a disappointing market update released to the market.
Its shares are down by a massive 22% to 45.5 cents after it advised that due to a slower-than-expected ramp-up of work, management expects the company to make a net loss of $2 million for the half year ended 31 December 2016.
Although the significant mobilisation of its oil and gas projects has commenced, it is far later than the company had envisaged. Furthermore, despite tendering activities in the mining and utilities sectors remaining strong, a number of its clients have not released contract packages as quickly as first expected.
Another factor negatively impacting its first half results will be its newly acquired telecommunications subsidiary Datatel. Like other sides of the business, it too has suffered from a slowdown of work in the NBN roll out in Western Australia.
But management expects things to pick up in the second half, especially with its expansion onto the east coast recently commencing.
As a result the company believes that it will deliver full year net profit after tax in the range of $4 million to $5 million.
Whilst it is great to see that the company expects a much stronger second half, it can't escape the fact that its full year net profit after tax forecast is significantly lower than FY 2016's results.
In FY 2016 Southern Cross Electrical Engineering delivered underlying net profit after tax of $5.4 million. This means FY 2017's result will be a drop of 7.4% to 26%. Judging by the drop in its share price today, it would appear as though investors are fearing the worst.
Considering how poorly the company has done at forecasting its first half performance, I don't have a great deal of confidence in the company forecasting the rest of FY 2017.
Whilst the shares of mining services companies such as Southern Cross Electrical Engineering, Worleyparsons Limited (ASX: WOR), and Monadelphous Group Limited (ASX: MND) have performed strongly this year, I would take profits and move out of the sector.
Capital expenditure is falling, competition is strong, and margins are falling. This doesn't bode well for growth in my opinion and investors would be better served in other sectors.
