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Resource services companies offer investors an alternative path to gain exposure to the mining boom. And the services provided are diverse, so there’s no shortage of choice. The vast pipeline includes drilling and blasting, mine design and engineering, dewatering, building miner accommodation, dump truck body manufacturing, repairs and maintenance and civil construction. Primary earnings drivers for resource services companies are mineral exploration and production levels, which, in turn, are influenced by commodity prices. Generally, as commodity prices increase so does spending on exploration and production.

Mike Bigwood, of Patersons Securities, monitors the performance of resource services companies and offers his choice list for consideration. Overseas demand for Australia’s commodities can increase or ease, and this needs to be taken into account before investing. However, Bigwood says: “While cognisant of a potential slowdown in Chinese demand, my list of companies are all emerging and have a track record of earnings growth, a strong return on equity and clean balance sheets. I see better value in these compared to the larger more established companies.”

As there’s no specific global industry classification system (GICS) for resource services companies, four of Bigwood’s choices sit within the industrials sector. The other sits in energy. The industrials sector consists of 186 companies for a total market capitalisation of $108.6 billion. The industrials sector includes the categories of capital goods, commercial and professional services and transportation. The sector, as compared to the S&P/ASX 200, has been a disappointing performer over the past 12 months and five years. Industrials booked a negative annualised price return of 7.03 per cent for the 12 months to April 30, 2011, and a negative 8.07 over five years. Comparatively, The S&P/ASX 200 delivered a positive .33 per cent for the year to April 30, 2011 and a negative 1.71 per cent over five years. But looking forward, Bigwood has selectively chosen companies he expects to reward investors over time in line with continuing strong demand for Australia’s resources.  

Forge Group (FGE)
Market Capitalisation: $505 million
Price/earnings: 13 times
Share price: $5.86

 

Chart: Share price over the year to 27/05/2011 versus ASX200 (XJO) 

Forge Group provides engineering, procurement, construction management and maintenance services to resources and civil clients in Australia and West Africa. Bigwood says the company posted a NPAT (net profit after tax) compound annual growth rate of 123 per cent between 2007 and 2010. Expect continuing strong earnings growth as evidenced by the 2011 first half that was up 43 per cent up on the prior period. “With a return on equity in the mid 30 per cent region, I see this stock as attractively priced at current levels,” Bigwood says.

Maca Limited (MLD)
Market Capitalisation: $354 million
Price/earnings: 12.2 times
Share price: $2.47

 

Chart: Share price over the year to 27/05/2011 versus ASX200 (XJO) 

This provider of contract mining, civil earthworks, crushing and screening services has been a strong performer. Bigwood says annual revenue has grown from $29 million in 2005 to $155 million in 2010. Expect the 2011 NPAT forecast of $23 million to be exceeded after reporting $15.1 million for the first half. Bigwood says gold and base metals provide the bulk of company revenues from Western Australia’s mid-tier miners. “A recent contract win in South Australia is the first outside WA and could open the door to further geographical expansion and further earnings improvement,” Bigwood says.

Decmil Group (DCG)  
Market Capitalisation: $403 million
Price/earnings: 15.3 times
Share price: $3.24

 

Chart: Share price over the year to 27/05/2011 versus ASX200 (XJO) 

Decmil is a multi-disciplined design, civil engineering and construction company focusing on regional Western Australia. It provides specialist services in clients’ non-core areas, such as accommodation villages, civil works and construction of non-processing infrastructure. Its clients include Woodside Petroleum, BHP Billiton, Fortescue Metals Group and Chevron. “After a strong first half performance, management has guided that the second half should be similar in terms of earnings,” Bigwood says. “As such, I am confident the shares are trading below their valuation.”

Matrix Composites & Engineering (MCE)
Market Capitalisation: $649 million
Price/earnings: 19 times
Share price: $8.14

 

Chart: Share price over the year to 27/05/2011 versus ASX200 (XJO) 

Makes specialised engineering products for the offshore oil and gas industry. “The main product is buoyancy modules for offshore drilling rigs – the easiest explanation is that they are like floaties on a child’s arm when swimming,” Bigwood says. “The recent completion of a new manufacturing facility should improve efficiencies, reduce costs and increase production. After a strong first half, the company is on track to record another record full year result. The main risk to earnings is the strong Australian dollar.”

Austin Engineering (ANG)
Market Capitalisation: $338 million
Price/earnings: 15 times
Share price: $4.94

 

Chart: Share price over the year to 27/05/2011 versus ASX200 (XJO) 

Austin engineers and fabricates products for the mining and industrial sectors. These products include dump truck bodies, excavator buckets, water tank trucks and tyre handling equipment. Listed in 2004, Bigwood says the company has made several acquisitions to grow its footprint and expand the range of services. “This has seen earnings and the share price grow strongly,” he says.  “Importantly, despite various capital raisings, the return on equity has remained at high levels. With gearing around 26 per cent and return on equity at 25 per cent, I think the shares offer investors good long term value.”

Market capitalisation and price/earnings at May 23, 2011
Share prices taken at May 27, 2011

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