Credit Suisse is noting that there has been a bounce of 17% since last October in mining contractors versus 10% for the overall market. The contractors’ earnings multiple is trading in line with its three-year average discount to market of ~8%. Given that it is a way of getting exposure to the mining boom without as much influence from commodity price fluctuation, it is certainly worthy of attention.
Credit Suisse is not especially bullish, however, saying that order books are likely to be flat:
Announced contract awards and renewals across the sector were generally below historic averages over the six months to December and lead us to believe we are likely to see a lack of order book growth across the sector. On average, we estimate a 3.3% decline in order books relative to June 2011. The lack of order book growth is also likely to constrain any significant margin expansion across the sector.
Balance sheets will be a key focus area, particularly for LEI and DOW: For LEI and DOW our key focus at the result will be cashflow, working capital draw down of troubled projects and balance sheet position. We forecast LEI gearing of ~31.5% at the result, still below 35%–45% management target range. However, we believe risks remain around HLG, which could put upwards pressure on our forecast gearing. We note that balance sheet flexibility is key to taking advantage of contract mining growth opportunities. For DOW, gearing remains below management target; however, liquidity is key given DOW’s upcoming debt maturities in 2012. Resources contract awards remains the key to sector earnings upside: The Australian resources capex pipeline remains robust at $345bn; however, growth in new project announcements has stalled over the past six months. Contractors continue to point to high levels of tendering activity; however, this is yet to translate into material contract wins and order book growth. This is a key catalyst for sector earnings upside. We estimate $183bn of resource projects could be in a position to award contracts in 2012.
That is not exactly what one would expect as the mining boom is accelerating. One has to wonder why? There has been plenty of tendering. CS points out that the absolute value of resources capex in Australia of $344.8bn is still substantial and 156% higher than in Dec-08, but there has been a declining rate of growth in new project announcements. Perhaps the optimism about resources has been somewhat overdone.
CS is neutral on Leighton, UGL, Downer and Worley Parsons, and has outperform ratings on Transfield and Boart Longyear.