Of all the companies in the S&P ASX 200 Index (ASX: XJO) over the past three months of trading, the one with the greatest gain was Transfield Services (ASX: TSE). What is been driving the 59% rise in share price?
The company is a project management services and operator of infrastructure developments and assets. It covers mining, roads and public transport, government and social infrastructure as well as telecommunications. After recovering somewhat from the GFC, revenue and earnings began to trail down since 2010, and with mining-related revenue at about 40%, it was going to feel the commodities slow down.
What's been happening?
It is now scaling back its operations, and selling off non-core business assets. It just sold its 50% share in a joint venture with WorleyParsons in New Zealand for $30 million, and has decided to divest its assets in Qatar to put its focus clearly on the Australian market.
Revenue was up in 2013 from $3.1 billion to $3.4 billion, but NPAT slipped from $77 million to $67 million. It also had an enormous $340 million write-down on assets, mostly coming from its mining-related businesses. That's a hit no one likes, but it pares back the balance sheet to realistic value, so new investors can start at a lower share price.
Its earnings guidance for 2014 is between $65-70 million, roughly where it is now, so what can investors look for in the future? The company has been awarded contracts for telecommunications work to roll out the NBN, the national broadband network.
The network expansion plans have not been going to plan, and there are delays talked about in the news, but it won't be completely halted and forgotten. Someone has to put in that fibre cable and networking system, and Transfield has some of the contracts for it. A $366 million contract was awarded for NBN in Victoria, and in March a Sydney contract for $170 million came its way, too.
Mining still isn't as strong as it was only just a few years ago, but now the view is the pace of mining will pick up, and grow at a more stable rate. Earlier mining gains were due to China pumping money into industrial projects to ward off the GFC.
Another 25% of China's population, about 300 million, will be moving into urban areas over the next 20 years, and they will need homes, stores and buildings. Australian mining will be supplying that city building.
This 59% gain in share price, which is now at $1.39, may be the start of a longer run up as it trims the fat and excess. Other companies in similar businesses like NRW Holdings (ASX: NWH) and Mineral Resources (ASX: MIN) have decent net profits margins and returns on equity, so compare them to Transfield Services to understand the company's value better.