Mining services’ fortunes looking up: UBS
Australia’s mining and engineering contractors are on the cusp of a sustained upwards surge.
Australia’s mining and engineering contractors are on the cusp of a sustained upwards surge reminiscent of that seen during the last mining boom.
That’s the view of Stephen Wood and Victor Gomes, the portfolio managers of the UBS Australian Small Companies Fund, who are convinced that the combination of a recovery in spending by mining companies, a surge of investment in east coast infrastructure and the rapid growth in renewables around the country will support strong margin growth in the coming years.
Shares in Australia’s listed contractors, which were smashed during the post-mining construction boom downturn, have already staged a strong comeback in the past 18 months. WorleyParsons has quadrupled in value, while the likes of Monadelphous, Macmahon and Seven Group have more than doubled.
The performances by Perth-based duo NRW and Ausdrill have been even more eye-catching, with NRW up 2366 per cent and Ausdrill up more than 1000 per cent from their early 2016 lows.
Despite those runs, both Mr Wood and Mr Gomes believe the sector has plenty of upside ahead of it.
The pair point to the emerging recovery in capital expenditure across the mining sector — particularly in iron ore and coal — after years of underinvestment in sustaining capital as one of the biggest catalysts for the sector.
Spending on major east coast infrastructure projects such as the massive WestConnex project further improves the outlook, while there is already major investment in utility-scale renewable energy installations taking place across the country.
Mr Wood told The Australian he was confident the improved conditions in the sector were not a “flash in the pan”.
“There’s a significant change that’s happening,” he said.
“It’s not a false start and there’s a lot of work around, whether it’s keeping production going in iron ore or coal or putting in roads or tunnels or bridges on the east coast or developing housing estates in southeast Queensland where there’s strong population growth. There’s just a whole bunch of reasons why all these guys are going to be busy for years.”
A number of contractors have seized upon the resurgent interest in the sector to get away equity raisings in recent months, with Ausdrill late last month raising $100m in fresh equity and MACA following less than a fortnight later with its own $60m placement.
Mr Wood said the equity raisings supported UBS’s thesis of a prolonged turnaround in the sector.
“These guys need a certain amount of capital to match up with their order book. When they start taking orders, firstly equipment needs to be purchased and quite often the client will ask for some form of bonding,” he said.
The UBS fund moved to an overweight exposure to the mining services sector earlier this year, although it did step in and start buying shares in WorleyParsons — which at the peak of the boom was worth more than $50 a share — early last year when the stock fell towards $3 a share. It is now trading around $13.
The strong investor support for the sector has also been reflected in the recent developments at NRW and Seven Group.
In recent weeks, both groups have announced significant acquisitions followed by equity raisings.
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