MENU

Mining services companies yet to face the worst

Mining investment has not yet reached the bottom – signalling more pain ahead for mining services companies.

That’s according to the Reserve Bank of Australia’s new governor Phillip Lowe. In his opening speech to the House of Representatives Standing Committee on Economics, Mr Lowe said, “While mining investment still has some way to fall, our estimate is that around three-quarters of the total decline is now behind us.

That could be either good news or bad news for construction and engineering firms like Monadelphous Group Ltd (ASX: MND), Bradken Limited (ASX: BKN), Ausdrill Limited (ASX: ASL), Maca Ltd (ASX: MLD) and RCR Tomlinson Limited (ASX: RCR).

It could mean that the sector is through most of the rough patch and that a recovery is ahead. It could also mean that revenues and earnings are still going to fall in the short term.

That’s fairly evident when you consider Monadelphous’ annual financial results over the past five years. Revenue growth is going backwards and accelerating as are profits as the table below shows. As good as Monadelphous’ management have proven themselves to be, the waves sweeping through the sector are affecting even the best companies – and there’s not much that they can do about it.

2012 2013 2014 2015 2016
Revenues      1,897.5      2,614.1      2,329.6      1,865.0      1,364.7
Net profit          126.0          156.3          138.6          105.8            67.0
Margin 6.6% 6.0% 5.9% 5.7% 4.9%
EPS ($)            1.42            1.73            1.50            1.14            0.72
Dividend ($)            1.25            1.37            1.23            0.92            0.60
revenue growth 37.8% -10.9% -19.9% -26.8%
profit growth 24.0% -11.3% -23.7% -36.7%
margin growth -10.0% -0.5% -4.6% -13.5%
dividend growth 9.6% -10.2% -25.2% -34.8%

Source: Company reports

From an 11% fall in revenues in 2014, to a 20% fall in 2015 and a 27% fall in 2016, 2017 could be even worse and likely to magnify the fall in net profit as well.

Other mining services companies didn’t fare as well. Maca saw its net profit more than halve in 2016, falling from $54.4 million to just $24.2 million. RCR Tomlinson saw its underlying net profit sink from $51.4 million in 2015 to $20.1 million.

The problem for investors jumping into mining services companies now is that the current dividends are likely unsustainable. Monadelphous has cut its dividend each year of the past four years and 2017 is likely to be the fifth consecutive year.

That’s why the current dividend yield of 7% at the current price of $8.63 is misleading.

Foolish takeaway

Trading on a P/E of ~12x, Monadelphous doesn’t appear cheap enough to compensate investors for the almost certain plunge in earnings and dividends in the 2017 financial year. Beyond that, we could begin to see a recovery in the sector.

 

3 More Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You’ll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an “emergency low.” Simply click here to uncover these stocks - No credit card required. 

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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!