Mining services companies survive – for now

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Friday 26 September 2014 - Diversification, efficiencies and innovation will be the best recipe for survival for mining services companies under ongoing pressure from a mining sector focused on productivity.

EY’s latest annual analysis of ASX-listed mining services companies, being those who generate more than 25% of their revenue from the mining industry shows that while the scale of business failures has not been as significant as anticipated, the average sector debt levels and ongoing focus on cost continue to place pressure on businesses.

EY Oceania Restructuring Leader Vince Smith says the number of mining services companies has dropped 8% in FY14, with companies exiting the index due to failure or merger/acquisition.

“Despite this the total market capitalisation of the index of listed mining services companies has increased by 7%, against a 15% increase in the market capitalisation of the ASX All Ordinaries Index,” he says.

“With total debt for mining services companies still at historical highs, and capital investment by the mining sector forecast to fall a further 10% in FY15, conditions are only going to get tougher for those in this sector who are unable to adapt.”

The EY analysis also shows a widening valuation gap between diversified and specialised mining services companies, with specialised mining companies trading on average EBIT multiples below diversifieds. 

“Diversification provides resilience against the increasing volatility, with a perception of lower risk, and it is clearly being rewarded in the market.”

Smith says the increasing focus of mining companies on productivity means continuing pressure on service companies to deliver further efficiencies, demonstrate increased value or to be able to differentiate themselves through innovative services or solutions.

 “Mining services companies that have strengthened their balance sheets and innovated to differentiate themselves are well positioned – but the tough times will continue for the rest.”

EY Oceania Mining & Metals Transactions Leader, Paul Murphy, says the relentless pressure on the services sector to reduce costs, achieve scale and invest in innovation and productivity, is likely to mean more M&A activity.

“Conditions have been ripe for significant industry consolidation and M&A in the sector for a few years now and we are only now starting to see activity. We believe we are on the cusp of consolidation in FY15 given the need to diversify, and leverage size and scale,” says Murphy.

Mining services by numbers in FY14

  • 77 companies were identified on the ASX (down from 84 in FY13) which generate more than 25% of their revenue from mining services, either through equipment or non-equipment (eg labour and consumables) services.
  • The large majority of the listed players are diversified into infrastructure, utilities and commercial and government projects not directly related to mining and are therefore exposed to broader market trends.
  • Of the seven companies removed from the list, three entered external administration and four merged or were acquired by non-ASX listed entities during FY14.
  • There are an estimated 300-400 sizeable unlisted mining services businesses in Australia.
  • The total market capitalisation of the 77 mining services companies increased 7% in FY14, compared to 15% for companies in the ASX All Ordinaries index.

Trading performance

  • The trading gap between equipment and non-equipment focused companies widened during FY14, with equipment median EBIT multiples exceeding non-equipment multiples.
  • In FY14 63% of the companies which had a broker consensus forecast failed to achieve forecast EBIT and on average, actual EBIT was 18% down on broker consensus forecast.

Debt and gearing

  • While the debt to equity ratio improved marginally (3%) during FY14, total sector debt levels continue to be close to historical highs at $20.6b for the companies in the index.
  • Interest cover fell 9%.
  • Middle market players ($500m-$1bn capitalisation) increased debt 27% to $1.9b in total, while large companies (over $1b capitalisation) reduced debt 8%.

Equipment market

  • Revenue returns on fixed assets were down 8% in FY14.
  • Revenue for construction focused businesses dropped 21%, the first decrease in revenue since 2009.
  • Debt to fixed assets continued to trend upwards for production businesses and increased 6% for construction businesses.

Non-equipment market

  • Non-equipment EBITDA margins have declined 7% with production falling for the third year in a row.

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Notes to editors
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