Mining services catch a break

We might just be seeing the start of a re-rating for the embattled mining services sector.

The mining-services sector could finally be catching a break with WDS (WDS) and Imdex (IMD) topping the leader board this morning after posting pleasing results.

WDS wowed the market by upgrading its full-year net profit guidance to between $12 million to $14 million, from $10 million to $12 million, following a review of its first-half performance, which saw better than expected margin growth in the energy division.

Consensus forecast was only tipping a net profit of $11.2 million for the year ending June 30, 2014, and the stock jumped 6.1 per cent to 95.5 cents in late morning trade. That is just half a cent shy of its four-year high that was hit this week. The upgrade is likely to prompt analysts to lift their earnings forecast by around 16 per cent and that would put the stock on a 2013-14 price-earnings multiple of 11 times.

On the flipside, WDS’ mining division is still facing challenging times as clients in the coal sector continue to focus on cost cutting due to the weak outlook for the commodity. But as Tim Treadgold wrote on Friday, sentiment towards the local coal industry could soon be turning. We highlighted WDS as one of the better placed mining services small caps in August last year and the stock has surged over 60 per cent since. The company will release its half-year result on February 26.

Meanwhile, drilling products and services group Imdex has also fired up investors with a better-than-expected result. The stock raced up 9.1 per cent to 60 cents even as the group’s statutory revenue tumbled 28 per cent to $92.2 million for the six months to end December. But net profit slipped a relatively minor 8 per cent to 15.3 cents due to the profit booked on the sale of part of its stake in Sino Gas & Energy Holdings (SHE).

If you reversed out the sale of the shares, net profit would have turned into a $4 million to $5 million loss. This makes it harder to compare the result to market expectations but investors, nonetheless, are encouraged to see first-half sales come in ahead of consensus estimates of $89.8 million. The stock is also looking reasonably valued in light of the uncertain outlook for the sector as it on a current year P/E of around seven times. Management didn’t give any guidance for 2013-14, but said it is looking to increase its exposure to the robust oil & gas sector as the minerals industry continues to struggle.

It’s still too early in the reporting season, but we might just be seeing the start of a re-rating for the embattled mining services sector.

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