Mining Services Sector Update

Submitted by Jim Thesiger on 2 June, 2008 - 23:17

Here is an update on the Australian Mining Services Sector provided by Australian market analyst UBS.

Energy Boom – The Beneficiaries!

Mining Services companies such as Boart Longyear (BLY) and Worley Parsons (WOR) are the companies that stand to make considerable gains from the continuing resources boom, record commodity prices and the industrialization of the world’s emerging economies. Macquarie Research (MRE) have a very bullish outlook for the mining services sector due to strong demand for mining products and services combined with continued growth in exploration – BLY is MRE’s pick in the sector. US peer, Joy Global, reported 2nd quarter earnings above consensus, raising full year 2008 earnings guidance by 5% on stronger revenues and an anticipated increase in demand for mining equipment. Joy Global and Bucyrus shares both surged by 4.7% during Friday’s session and Layne Christensen gained 3% ahead of this week’s earnings results. In Australia, …

Boart Longyear shares jumped by 11.6% to $2.07 on Friday after they increased their full year sales growth forecast to 20-25% from the previous estimate of 15% - 5% of which will be attributable to acquisitions. MRE have lifted the 12 month price target for the largest drilling services provider in the US, Canada and Australia from $2.47 to $2.54 with an Outperform recommendation.
1. The pricing outlook for services looks firm with 10% price rises likely.
2. Margins in the business are being maintained with 23.6% FY08 EBITDA v. 22% in 2H07.
3. The stronger AUD and CAD translate to increased revenue.

Worley Parsons has been a stellar performer with a cash-strong balance sheet. MRE maintain a neutral recommendation for WOR stock which closed at a 14% discount to its 12 month price target of $43.55.
1. Energy price spike hikes due to a world-wide energy shortage support further investment in exploration of oil and gas reserves with an increasing complexity in reaching hydrocarbons further supporting WOR’s business.
2. Firepower for the pursuit of further acquisitions to fill geographic and skill gaps along with additions to front-end capability and 27,000 new staff.
3. Emergence of the sustainability trend with WOR well-placed to grow revenue due its sustainable technology skill base in an effort to reduce energy consumption, reduce emissions and explore nuclear power further - pending a change in government policy.

In the smaller cap stocks, Bradken, Ausenco and Campbell Brothers could potentially break through to the top 100 stocks of the Australian market if the performance skew between resources and industrials continues. The gulf between resources and industrials grew throughout May with Energy stocks gaining 18% and materials up 7% while Industrial stocks lost 2%.