Markets: Bradken's services sector salve

Over the years, Bradken’s results have been a guide to how the broader mining services industry is travelling. If its results are anything to go by, things aren’t as bad as we might have thought.

Reporting earlier today, Bradken posted a net profit after tax of $96.1 million, in line with analyst estimates. This figure is down 4 per cent on the previous years – a good result when considering sales were down 10 per cent over the same period.

Over the past 12 months, miners have reduced capital expenditure heavily amid concerns about global growth and falling commodity prices. Last week Rio Tinto detailed a 20 per cent drop in its capital expenditure, down to $14 billion.

The anticipated decline in spending is set to push out to more than 20 per cent in 2014, a reduction greater than what we saw during the global financial crisis. Bradken’s own outlook mirrors this view, with expectations 2014 will bring difficult market conditions, particularly in the first half of the year.

But Bradken has remained profitable in a difficult sector by making changes to its operations which saw profit margins increase from 29.8 to 32.7 per cent. A nearly 3 per cent jump in one year reflects the cost savings and improved efficiencies across the business.

If Bradken successfully appeals Federal Court proceedings associated with its Norcast acquisition, the one-off $30.4 million charge will be included in profit figures, bumping earnings per share to 56.8 cents, up from the 39.6 cents reported. The falling earnings per share have resulted in the final dividend being cut, bringing the yearly dividend to 38 cents, down from 41 cents.

Investors have to cop a falling dividend – which is definitely not desirable in the low-interest rate world we are living in – and a share price that is down 16 per cent over the past 12 months.

Despite weaker economic conditions, the future for Bradken looks promising. It has shown it can be profitable by taking the obvious measures of spending less and focusing on decreasing working capital requirements.

If reporting time brings similar figures for Bradken’s peers, it could signal a promising future for mining services. But the broader market has trepidations, with strong short interest in Bradken at 10 per cent, and competitors Monadelphous Group at 13 per cent and Cardno at 8 per cent.

Bradken has started the day strongly, up 7.25 percent at 1132 AEST to $5.62, against a benchmark S&P/ASX200 index rise of 0.13 per cent.