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Mining service firms continue to disappoint shareholders

There shouldn’t be too many surprises left in the mining services sector now, with many firms having previously come out with one, if not more, downward revisions to profit expectations.

While there doesn’t appear to have been any unexpected bad news in the results of global drilling firm Imdex (ASX: IMD) or accommodation provider Fleetwood (ASX: FWD), over the past few weeks the market has probably prematurely been anticipating more positive outlooks from the sector which has seen these stocks rally. That rally now appears to be evaporating.

Today’s full year profit announcements have been met by heavy selling, with Imdex sold down around 11% and Fleetwood sold down by over 15% in the opening hour of trade. As the chart shows, it has been a nasty 12 months for shareholders in these stocks — while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has climbed nearly 17%, Imdex is down 59.6% and Fleetwood 72.6%.

chart1

Source: Google Finance

Sadly for Fleetwood, shareholders not only have seen their share price fall substantially but they have also had the final dividend reduced to nil from 43 cents last year. Net profit after tax (excluding discontinued operations) fell to $16.7 million down from $55.2 million in 2012.

Things weren’t much better for Imdex shareholders. The company announced a 58% fall in net profit after tax to $19.4 million. The lower profit has in turn forced the board to reduce the final dividend from 4 cents in 2012 to just 0.4 cents in 2013.

Foolish takeaway

Other mining service firms, including Emeco (ASX: EHL) are facing a rocky near-term future too. For those carrying heavy debt loads it will require capital management initiatives such as cutting the dividend to shareholders and potentially dilutive capital raisings. While stocks in the sector may at first glance look like bargains, Foolish investors should remember that they are cheap for a reason.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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