PORTFOLIO POINT: Australia’s resource powerhouse, Western Australia, is on the cusp of a building and construction boom which could set the state up for the next 50 years.
Forget mining companies, think builders: That’s the best way to create exposure to the next phase of the resources boom, which has made WA the fastest-growing region in Australia.
This advice, without specific investment suggestions, comes from the man who knows more about WA than most – the state’s premier, Colin Barnett.
“My view is that this is the decade when we build our long-term productive capacity,” Barnett told Eureka Report in an exclusive interview.
What he means is that the initial rush to explore, discover, design projects and secure customers for the state’s commodities is slowing, along with some mineral prices, but the business of building and maintaining projects is accelerating.
“This surge of investment, mainly in iron ore and natural gas, with other commodities, is basically a lift in capacity that I don’t think we will see repeated. So, by 2020 this state will have reached its long-term level of production.
“Most of the new infrastructure will be built between now and then and that includes ports, railways, liquefied natural gas terminals, the lot.”
For investors, Barnett’s observations create two challenges.
Firstly, the need to separate miners and petroleum producers exposed to erratic commodity prices from construction companies, engineers and other companies, which are paid for their services whether commodity prices rise or fall.
And secondly, finding ASX-listed companies which have a clear focus on WA, and perhaps Australia’s other fast-growing resource state, Queensland.
National construction leaders, such as Leighton and WorleyParsons, are big players in WA, just as they are exposed to slower-growing states such as Victoria and NSW.
Names to consider for maximum WA resource project-building exposure, including some which are not researched by the major investment banks and stockbroking firms, are: NRW Holdings (ASX code NWH), Mineral Resources (MIN), Decmil Group (DCG), Mermaid Marine (MRM) and Monadelphous Group (MND).
But before looking at that suggested portfolio of WA stocks in detail, it’s worth a closer look at why WA deserves separate treatment, and why Barnett is so optimistic.
Two reports published last week highlighted the difference between WA and other states, with CommSec chief economist Craig James providing the best assessment of the position, after releasing his March quarter State of the States review.
“In the latest report the best way to describe the situation is WA first and daylight second,” James said.
WA, according to CommSec, is leading Australia in five out of eight criteria: overall economic growth, retail trade, equipment investment, construction and population growth. WA is also equal with the Northern Territory on employment creation.
WA lags on housing finance and dwelling starts, but when other factors are considered that could simply be a timing issue, because it is hard to image an economy growing rapidly without housing joining in at some stage.
CommSec’s view of the difference between WA and the rest of the country was supported by the latest Deloitte Access Economics assessment of Australia.
Deloitte partner Chris Richardson described the situation as “less welcome news”, but confirmed that “the two-speed split in Australia’s economy is widening”.
“WA growth remains dominated by a project investment pipeline of simple awe inspiring dimensions,” he said.
“Although export volumes are set to grow too, for now the pace of growth will be dictated by the success (or otherwise) in the pace of project delivery.”
What Richardson meant by that comment is that some projects are suffering from budget blow-outs and completion delays caused by underestimating the difficulties of working in remote parts of an already remote state, or failing to allow for cost inflation and skill shortages.
The Sino Iron project of CITIC Pacific is the worst example of what happens when troubles at a complex project spiral out of control. What should have been a showcase of Chinese/Australian cooperation has become a project which is three years overdue, and $4 billion over budget, with an initial $2.5 billion cost estimate now put at $7 billion.
Barnett has little to say about Sino Iron, a project which has added to the wealth of mining entrepreneur Clive Palmer, through iron ore sales to Sino and a future royalty stream due to start flowing next year.
But the premier is optimistic about the overall resource development trend for WA, which has created shortages of many services, a sharp rise in accommodation costs and a feeling for residents that the state is bursting at the seams.
“What I think people who take a longer-term view realise is that this is a jump up, and then there will be a plateau, and while the (resources) sector still will grow, and will be around for another 50 years, it’ll be more that one mine runs out of resources and another mine opens and takes its place,” Barnett said.
“We won’t see this lift in capacity again, in my view. You will see more diversification of the (WA) economy from 2020 onward once this period of capacity building has finished.”
Barnett’s view is more than that of a politician. He originally trained as an economist and is a former director of the Perth Chamber of Commerce. His connections to business run deep.
His view of future growth in the WA economy boils down to a change of focus from reliance on commodity prices and exploration news to one of developing what has been discovered.
It is stretching the point to say that the resources boom is over and a building boom has begun, but it is possible to see it in those terms.
Which leads back to the creation of a WA “resource-building” portfolio, and the five stocks best exposed to the next phase of the boom in a state which already accounts for more than 30% of Australia’s exports, and is on track to produce 50% of the country’s exports.
WA resource-builders to watch
1. NRW Holdings (NWH). Founded in 1994 in the hard world of the goldfields around Kalgoorlie, NRW started as a small construction and plant hire business that developed a name as a specialist tailings dam builder. From there, the business expanded across WA, moving into the Pilbara iron ore province in 1997 in time to catch the first wave of the modern iron ore boom. It now has a client base that includes BHP Billiton, Fortescue Metals, Chevron and Rio Tinto, which it has followed into the Simandou project in Africa. NRW’s success, which has lifted it into the ranks of companies valued on the ASX at more than $1 billion, has both surprised and delighted everyone involved, included its mine-hardened chairman Ian Burston. In the half year to December 31, revenue rose by 72% to $610.4 million, net profit rose by 123% to $45.3 million, the dividend doubled to 8c a share, and the order book stood at a record $1.67 billion, split over civil construction, mining and petroleum work. Over the past 12 months, NRW’s share price has risen from $2.06 to recent sales at $3.99, down from a peak of $4.36 set on March 20.
2. Mineral Resources (MIN). A company which started life as a specialist mineral processor selling rock-crushing services, Mineral Resources is showing signs of becoming a miner and commodity trader in its own right. The core business remains ore processing for clients such as Fortescue Metals, but first iron ore sales in its own name from the Carina mine were posted last year, and additional iron ore tenements acquired from the Kerry Stokes-led Iron Ore Holdings. Another prominent WA business leader close to Mineral Resources is iron ore heiress and Australia’s richest person, Gina Rinehart, who developed a business relationship with the company at a jointly-run manganese mine, and who has taken a direct 9% stake in the stock. Net profit in the latest half year to December 31 was up 33% to $80.5 million, from a 19% increase in revenue to $403 million. The future strategy is to develop a business with a mix of mineral processing, mining services and commodities production. On the market, Mineral Resources has risen from a 12-month low of $9.24 last October to recent trades around $12.03, down from a peak of $13.33 set in late February.
3. Decmil (DCG). Smallest and newest of the pure WA resource-exposed construction stocks, Decmil has specialised in simple building assignments such as accommodation villages for big miners, such as Fortescue Metals, and site preparation work for oil and gas producers, such as Chevron. Its current client list features a who’s who of WA mining, including BHP Billiton and Woodside Petroleum. Profit in the latest half year slipped to $13 million, compared with $14.1 million in the previous corresponding period, but the dividend was maintained at 2.5c a share. Revenue fell by 9.8% to $210.9 million, but the order book expanded to $500 million. The relatively poor first-half saw Decmil’s share price slide from $3.39 early last year to a low of $1.70 in September. It has more recently recovered to trade around $3.04, a price which values the company at $506 million.
4. Monadelphous (MND). One of the fastest-growing engineering, construction and plant maintenance companies in the WA market, Monadelphous (which means united) has distinguished itself recently by earning 'sell’ tips from top brokers such as Goldman Sachs. Analysts at GS like the stock, but argue that it has already hit its price target for the year, code for “as good as it gets”. That is not the way management sees the outlook, noting that there is strong demand for the company’s services across all sectors, with significant growth in the maintenance, industrial services and infrastructure divisions. Revenue in the half year to December 31 was up 26% to $879 million. Net profit rose by 26% to $57.5 million, and dividend per share was up 25% to 50c. On the market, Monadelphous has risen from a low of $15.30 last August to recent trades at $23.26, down from a 12-month high of $24.37 reached on April 2. At its latest price, the stock is capitalised at $2 billion.
5. Mermaid Marine (MRM). After a difficult birth in the early 1990s, Mermaid has enjoyed a solid run of success as the provider of specialist services to the offshore oil and gas industry. Core operations are located at Dampier and Broome, from where Mermaid operates 35 vessels, supply and logistics bases and ship repair facilities. As offshore oil and gas production increases around Australia’s west and north coasts, Mermaid is well positioned to grow. Net profit in the half year to December 31 rose by 35% to $27.6 million, from revenue up 44% to $193.1 million. The company’s dividend was up 25% to 5c a share. On the market, Mermaid shares have been flat for much of the past 12 months, rising from a low of $2.62 late last year to a peak of $3.44 in mid-February. Recent trades have been around $3.21, valuing the stock at $703 million.