Motley Fool Australia

Is there value in mining services?

There’s no doubt that the mining services sector has been severely hammered over the past 12 months or so, as producing miners bring operations in house, cancel exploration projects and do everything they can to wring lower costs in the core operations.

But at current prices, many mining services and construction & engineering companies are trading at less than half of their book value. History has shown that investors can do well buying stocks that are trading at discounts to their book value. In fact, the father of modern investing Benjamin Graham was well known for investing in these types of stocks.

Nowadays, it’s rare for a company to trade below book value – it effectively means Mr Market is valuing the ongoing business at zero.

As some examples, Boart Longyear (ASX: BLY) is trading for one-fifth of its net assets, as is Forge Group (ASX: FGE), while Ausenco (ASX: AAX) and Ausdrill (ASX: ASL) are both trading at one-third of their book values, while MacMahon Holdings (ASX: MAH) is trading at 40% of its book value.

The upside for investors in these companies now is that the whole sector has been written off, and large institutional investors will either have sold out or loathe to buy more. Broker analysts will be having a hard time trying to attach a buy rating to these stocks, and attracting any positive interest in these stocks. It doesn’t help that many of these stocks have been chucked out of the ASX indices – many managed funds are limited to investing in the top 200 or so companies.

For those investors willing to get their hands dirty and dig deeper into balance sheets, company announcements and/or speak to management, there could well be some hidden gems among the dross.

Here are a few pointers to look for. Companies with no debt and positive cash balances are less likely to need to raise capital and dilute shareholders. Intangible assets are likely to be worth nothing in a fire sale, so exclude them. Not all construction and engineering companies are wholly devoted to the resources industry, some have divisions dedicated to servicing oil and gas, utilities, power or government infrastructure sectors.

Foolish takeaway

When the market as a whole has turned against a sector, some of the babies may have been thrown out with the bathwater. That may well be an opportunity for Foolish (capital ‘F’) investors.

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Motley Fool writer/analyst Mike King owns shares in Ausenco and Forge Group. You can follow Mike on Twitter @TMFKinga

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