Why this fund manager is ploughing back into mining services

Wilson Asset Management and other fund managers think the worst may be over for the mining services sector

a woman

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The mining services sector has had a rough time of it over the past couple of years.

As the construction and engineering sector table below shows, the average decline in share price is 58%, and only 3 companies out of 31 have managed to increase their share prices.

By comparison, the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) is up 14.5% since early January 2013.

Company Market Cap ($m) Jan-2013
Cimic Group Ltd (ASX: CIM)       11,944.8 93%
Monadelphous Group Limited (ASX: MND)             705.6 -69%
UGL Limited (ASX: UGL)             348.5 -81%
Service Stream Limited (ASX: SSM)             294.7 -76%
Ausdrill Limited (ASX: ASL)             268.6 -72%
Maca Ltd (ASX: MLD)             254.8 -52%
RCR Tomlinson Limited (ASX: RCR)             213.4 -22%
Watpac Limited (ASX: WTP)             144.2 31%
GR Engineering Services Ltd (ASX: GNG)             142.0 8%
Cardno Limited (ASX: CDD)             137.2 -92%
Decmil Group Limited (ASX: DCG)             132.5 -71%
Macmahon Holdings Limited (ASX: MAH)             119.8 -66%
Boart Longyear Ltd. (ASX: BLY)               90.7 -95%
Southern Cross Electrical Engineer Ltd (ASX: SXE)               80.7 -49%
Lycopodium Limited (ASX: LYL)               79.9 -67%
Global Construction Services Limited (ASX: GCS)               76.1 -49%
AJ Lucas Group Limited (ASX: AJL)               70.2 -89%
Seymour Whyte Ltd (ASX: SWL)               67.3 -26%
Ausenco Limited (ASX: AAX)               63.0 -90%
NRW Holdings Limited (ASX: NWH)               54.4 -90%
Saunders International Ltd (ASX: SND)               42.7 -33%
LogiCamms Limited (ASX: LCM)               28.3 -63%
Swick Mining Services Ltd (ASX: SWK)               23.4 -55%
Mitchell Services Ltd (ASX: MSV)               22.7 -75%
VDM Group Ltd (ASX: VMG)               21.9 -64%
Hughes Drilling Ltd (ASX: HDX)               18.8 -77%
Brierty Limited (ASX: BYL)               18.4 -56%
Mastermyne Group Limited (ASX: MYE)               12.3 -92%
E&A Ltd (ASX: EAL)                  9.9 -84%
Diploma Group Limited (ASX: DGX)                  5.2 -76%
Delta SBD Ltd (ASX: DSB)                  4.4 -86%
Average -58%
S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) 14.5%

Data provided by: S&P Global Market Intelligence

But some fund managers have been playing that space for a while now with some success, while others are dipping their toes in. So, could now be the time to re-enter the mining services sector?

WAM Capital Limited (ASX: WAM) chairman and well-known fund manager Geoff Wilson thinks so, recently naming Southern Cross Electrical and Maca Ltd as two companies his funds have invested in. Ben Griffiths from Eley Griffiths also agrees that the worst could be over.

Forager Funds is another fund manager diving into the sector and recently held shares in MacMahon Holdings, GR Engineering and Service Stream. The 3 companies are up 15%, 18% and a whopping 76% since the start of this year. Some of these companies aren't really mining services companies – but provide construction and engineering services to other sectors such as telecommunications. Service Stream is one that is profiting from the roll-out of the National Broadband Network.

If the commodities cycle has bottomed as many commentators think, then it does suggest that the most likely course from here is upwards. If resources companies start opening their purses and spending that will be the key factor in the revival of the mining services sector.

Foolish takeaway

Many companies in the sector look very cheap. Monadelphous is trading on a trailing P/E ratio of 8.7x at the current price of $7.77, and GR Engineering on a P/E of just over 9x, and paying a fully franked dividend yield of more than 10%.

Now may be a perfect time to take an in-depth dive into the sector with the potential to uncover some gems.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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