Investment bank Gresham believes conditions are right for significant corporate finance activity in mining services as companies in the sector look at growth and diversification strategies.
Highlighting the forecast as part of its quarterly review of mining services, a sector in which it includes oil- and gas-related service companies, Gresham said that generally improved equity market conditions could be a catalyst to businesses in this sector engaging in corporate finance activity to meet publically stated goals.
Gresham executive director Chris Branston said generally more buoyant equity markets had provided the right conditions for mergers and acquisitions in the sector.
Gresham’s index following the sector showed it had outperformed the S&P ASX 200 Resources index but not the broader S&P ASX 200.
“More interestingly, our review of the sector including the balance sheets, relative valuations and statements made about growth and diversification strategies suggests that the stars may be aligning for increased corporate activity,” Mr Branston said.
He said that during the past 12 months there had been considerable M&A activity at the lower end of the market, mainly based on acquisitions of smaller private companies. Public companies did have some competition in that space from private equity.
But conditions had now improved to a point where a broader focus on M&A was possible.
Nearly half of the companies reviewed, 23 out of 50, had signalled diversification in their product mix, 20 were looking at geographic expansion and 12 were considering acquisitions.
For example, Mr Branston named two companies, Cardno and Tox Free Solutions, as companies which had both had a history of making acquisitions and had recently expressed in public that they planned to continue this strategy.
Analysis of the disclosed corporate strategies of the Gresham Mining Services Quarterly constituents in the first half reporting season highlighted a number of key trends:
• Diversification. Nearly half of the companies disclosed a strategy to achieve greater diversification across products, services or commodities. This is consistent with our view that companies are looking to position themselves for the next stage of the cycle as major projects move from the construction to operation phase.
• New Geographic Markets. There was a similar focus on geographic diversification, with companies increasingly seeing growth opportunities and lower costs in overseas markets.
• Balance Sheet Strength. Only a handful of companies noted an intention to pursue debt reduction strategies. This reflects the fact that the sector is generally well capitalised and balance sheet replenishment is not currently on the agenda.
• Acquisitions. A significant proportion of constituents flagged acquisitions as being an important strategy, with oil & gas services being a focus of recent M&A activity.
• Cost Cutting. Nearly half of the sector highlighted cost reduction and productivity initiatives, following the activities of major mining customers. Interestingly, this focus on costs appears to be independent of the other strategies.
Gresham noted a wide range of share price performance across the surveyed group constituents, with 23 of the 50 companies recording movements of 15 per cent or more during the quarter.
It found performance was driven by a combination of the first half results, outlook statements and the market’s view of relative service and commodity exposures.
Three quarters of companies reported revenue growth in the six months ending December 31st, but only around half reported an improvement in net profit after tax.
Gresham said this reflected margin pressures from the tight labour market and strong domestic and overseas competition, as well as one-off impairments for some companies.