Investing in mining service companies is an astute strategy to gain exposure to the booming Chinese and Indian economies, according to analysts. Mark Goulopoulos, of Patersons Securities, says Bradken, WorleyParsons and UGL Limited are his choice selections for long-term capital growth.
Managed funds are another way of gaining exposure and Morningstar suggested Aviva Investors Elite Opportunities retail fund. Steven Hing, of Novus Capital, put forward the AMP Capital China Growth Fund, while Colonial First State recommended its Wholesale Global Resources Fund due to its exposure to base metals, gold, iron ore and oil.
What Goulopoulos likes about mining services companies is their exposure to resource volumes and capital expenditure without sensitivity to the price of the underlying commodities. He says this will become increasingly important as commodity prices eventually stabilise or even fall in response to supply catching up with demand. Goulopoulos argues that stable or falling commodity prices mean resource companies will have to generate bigger volumes to sustain profit growth. Bigger volumes mean more work for mining services companies.
Bradken makes and distributes mining products in Australia and overseas. Products include shovels and crawlers for earthmoving equipment, rail wagons for iron ore and coal and other equipment for crushing and screening in the mining process. “The key is that these items are consumable in the mining process and demand for them is directly attributable to the volume of material being mined,” Goulopoulos says. Bradken has dramatically reduced costs after establishing a rail wagon manufacturing operation in China amid plans to construct a foundry. Although Bradken’s share price has trended up consistently in the past 12 months, Goulopoulos says the closing of $8.30 on October 27, 2010, isn’t expensive. Based on his company’s forecasts, Bradken is trading on a price earnings ratio of 13 times for the 2011 financial year and a dividend yield of 4.6 per cent. “This assumes earnings per share growth of 22 per cent in 2011, which again highlights growth within the company.”
WorleyParsons generated revenues of $5.1 billion in 2010, Goulopoulos says. It has 30,000 personnel in more than 100 offices across 30 countries. “In other words, if capital expenditure on mining projects increases anywhere in the world, WorleyParsons is very likely to be a key beneficiary,” he says. In China, the company recently increased its stake in the MaisonWorleyParsons joint venture to 80 per cent, and it’s the country’s largest EPCM (engineer, procure, construct, manage) contractor. Worley’s closing share price of $22.61 on October 27 is a far cry from $54 plus in December 2007, although Goulopoulos acknowledges, “comparisons with the past are fraught with danger”. However, he says: “It’s a credit to management that Worley didn’t need to raise capital throughout the GFC and consequently avoided dilution experienced by so many other engineering and mining services companies.” Goulopoulos expects higher future profits to be reflected in a stronger share price.
UGL Limited facilitates specialised management services in water, power, rail and other essential infrastructure. “Its services model offers a smoother earnings profile than most of its peers,” Goulopoulos says. “It has the expertise and is ever ready to capitalise on increasing levels of spending in the underlying industries of infrastructure, oil, gas, resources and transport.” It also has a rapidly expanding property services (tenant focused) division across the globe. Goulopoulos says its order book totalling $9.1 billion is 11 per cent higher than this time last year, and this will drive strong revenue growth during the next 12 months.
Aviva Investors Elite Opportunities fund offers resources exposure via holdings in BHP Billiton, Rio Tinto, Woodside Petroleum and Wesfarmers. Among the fund’s top 10 stock holdings, BHP Billiton is first, making up 14.83 per cent of assets. The industrial materials sector accounts for a third of total weighting. The fund includes the big four Australian banks, with the financial services sector providing diversification and accounting for another third of total weighting. Morningstar analyst Tim Murphy describes the fund as a “gutsy benchmark-unaware portfolio of less than 30 names”, controlled by an adept portfolio manager. “The shop is a firm believer in the super cycle argument and resources names figure prominently among the top positive contributors to performance,” he says. “One aspect we particularly like about Elite Opportunities is its fee structure. Not only is there a low base, but the fee performance has one of the highest hurdles around.”
Hing, of Novus Capital, says the ASX-listed AMP Capital China Growth Fund, established in 2006, has US$250 million invested in China’s top 300 stocks. Closing at 92 cents on October 27, Hing says the fund is yielding about 9 per cent and is trading at a small discount to net asset value of 98 cents. Hing says while the fund has underperformed since the global financial crisis, China’s annual 10 per cent growth rate paints a brighter outlook despite higher interest rates attempting to slow the economy. He says AMP was one of the first foreign investors granted a licence to directly invest in China “There’s still substantial growth to come in the long term,” he says.
Colonial First State’s Wholesale Global Resources Fund invests in assets across Australia, Canada, Brazil, the US, the UK, South Africa and Asia. Spreading investments reduces risk in the event of a downturn in any one country or region, according to Dr Joanne Warner, of Colonial First State Global Asset Management. She says the fund invests in resources companies with world-class assets, low costs, production growth, healthy balance sheets and proven management. Dr Warner says improving living standards in China and India generates more demand for metals and energy. “That will support commodity prices and provide investment opportunities in companies that are able to grow their coal, copper and iron ore production,” she says. Although past performance isn’t necessarily a good guide for the future, Colonial First State says this fund posted an 11.52 per cent return before fees of 1.2 per cent for the 12 months to July 31, 2010.
|COMPANY||ASX CODE||SHARE PRICE AT 28/10/10|
|AMP Capital China Growth Fund||AGF||91.5 cents|
|National Australia Bank||NAB||$25.34|
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