Home' Forge : Vol 3 No 1 Contents wealth creator // 137
supporting Australian resource-
sector share prices in 2017.
But fast gains from here seem
unlikely, given the strength of
commodity-price rises in the past
six months. The worst is over for
resources, but it is too early to
say the good times are back and
here to stay.
Mining service sector appeals
Valuations hit extreme lows at the
peak of the resources downturn
as investors feared some mining
service companies would go bust.
Although larger service companies
had ‘locked-in’ contracts and a
reasonably full pipeline of future
work, that meant little as the big
miners, which had more power
over suppliers as sector conditions
deteriorated, cut costs.
Clearly, investors forgot the
adage: ‘Don’t get too bearish at
the bottom’. Mining service stocks
were horrendously oversold, but it
was hard to tell amid such extreme
Several mining service stocks
have soared in the past 12 months,
albeit off low bases. Sector
leader Monadelphous Group, for
example, has rallied from a 52-
week low of $5.62 to $10.68. NRW
Holdings, which was trampled
during the mining downturn, has
leapt from 4c to 71c.
Forge analysis of 31 mining service–
related stocks shows a median
one-year total return (including
dividends) of 75 per cent – a
stunning gain for investors who
bought mining service stocks when
they were on their knees.
Bradken and UGL were taken
over, and Macmahon Holdings
received a hostile takeover bid
this year – a sign that the smart
money (private equity and
offshore investors) saw value.
More takeovers in the mining
service sector are expected as
Stocks to watch
A few mining, energy and
infrastructure stocks appeal at
RCR Tomlinson rallied from a
52-week low of $1.11 to $3.06 in
early February, and looks to have
good growth prospects as it wins
more contracts. The diversified
engineering and infrastructure
company announced $100 million
in contract wins in January,
adding to its recent $155 million
solar-farm contract in Townsville.
It is also working on a Victorian
RCR’s increasing focus on rail,
transport and power infrastructure,
and on growing its presence in
renewable energy and water
projects, is attractive. RCR has less
leverage to mining service projects
than many providers.
A medium share-price target of
$3.07, based on a small group of
consensus analyst forecasts, suggests
that RCR was fully valued in
February 2017. The stock is due for a
share-price pullback or consolidation
after such strong gains, but is one of
the high-quality small-cap plays.
Downer Group is another with
improving prospects, reflected in a
strong half-yearly report released in
early February 2016 that beat market
expectations. Downer has rallied
from a 52-week low of $2.77 to $7.06.
Downer has had mixed fortunes
over the years, and it has
disappointed on a few occasions.
But the company has good
exposure to new projects through its
infrastructure, and rail and utility
divisions. Almost one-quarter of its
revenue comes from the resource
sector. Like other service companies,
it has reduced its exposure to
mining in the past few years.
Downer traded well above broker
price targets in February – the
consensus price was $5.04. Analysts
will be scrambling to upgrade their
forecasts after Downer ’s full-year
profit guidance upgrade, and in
anticipation of further upgrades as
it wins more contracts.
The stock is still well down on
peak prices in 2010, but has its
best momentum in some years.
Like RCR, it has good long-term
Swick Mining Services, MACA,
Mastermyne Group, GR
Engineering Services and Austin
Engineering are other well-run
mining services companies that can
rally further in the next few years.
As small-cap stocks in an
inherently volatile sector, they suit
experienced investors who are
comfortable with higher risk.
Tony Featherstone is a former
managing editor of BRW
and Shares magazines. The
information in this article should
not be considered personal advice.
The article has been prepared
without considering your
objectives, financial situation
or needs. Before acting on the
information in this article,
you should consider its
appropriateness regarding your
objectives, financial situation and
needs. Do further research of your
own or seek personal financial
advice from a licensed adviser
before making any financial or
investment decisions based on this
article. All prices and analysis at
2 February 2017.
Links Archive Vol 2 No 4 Navigation Previous Page Next Page