Mining the downgrades

Mining the downgrades

Yesterday, NRW Holdings Limited (ASX:NWH) joined a long list of resource and mining service companies materially downgrading their outlooks with the release of a “FY13 Guidance Update”.

Based on the guidance released at the Company’s interim result on 21 February 2013, the new forecast net profit after tax, for the year to 30 June 2013 has been cut by 15 per cent to a mid-point of $74.5m, on a 10 per cent reduction in revenue to $1.3b.

This however tells a small part of the story, and analysis of NRW Holdings results on a half-year by half-year basis is unhappy reading.

For the June 2013 half-year – the second half of the financial year – revenue is forecast at $489m, down 35 per cent on the previous corresponding period and down $321.4m or 40 per cent on the previous half-year ending 31 December 2012.

Estimated Net Profit After Tax is $25.9m, down 50 per cent on the previous corresponding period.

Net Profit Margins (Net Profit/ Revenue) have progressively slipped from 7.4 per cent (December 2011 half-year) to 6.9 per cent (June 2012 half-year) to 6.0 per cent (December 2012 half-year) to a forecast 5.3 per cent in the June 2013 half-year.

Notwithstanding our very many repeated warnings about the demise of the prospects for this sector, the NWH share price has now declined 77 per cent from $4.36 in March 2012 to the current $1.01.

Some fund managers who might call themselves deep value investors – and have paid much higher prices – may now be reassured that NRW Holdings is selling on a PE of 3.8X for the year to June 2013 given the forecast EPS of 26.7c.

Our investment philosophy is unchanged; buy extraordinary businesses, with bright prospects at rational prices. At the very least we are still unsure as to the prospects for mining services when the listed space of a few dozen companies masks the tip of an iceberg that has 800 companies vying for a diminishing pool of mining projects. Think about that for a moment.  There may be 20 or 30 listed mining services companies but there are about 800 in total in Australia and all of them are clambering to win work that is quickly being shelved, delayed or even mothballed.  Trying to pick ‘value’ in this space is more like playing Russian Roulette than it is value investing.

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Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.