Money Talks: Spheria Asset Management’s Oliver Coulon sees value in these mining contractors
Link copied to
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for.
Today, we hear from Oliver Coulon, Deputy Portfolio Manager at Spheria Asset Management.
Coulon’s current interest is on mining contractors and is mostly valuation-led.
“The market for mining capex has lifted significantly off the lows of a few years ago and is likely to remain near current levels, given the nature of commodity assets [which] require replacement just to maintain current levels of volume,” he told Stockhead.
“In many cases there has also been a meaningful reduction in industry capacity amongst the contractors.
“As such we believe the outlook for their returns and cashflows is reasonably constructive – despite this, in a handful of cases the market appears to be discounting a very material worsening in the operating environment.
“In these cases Spheria’s view is that the risk reward of owning these businesses appears far superior to chasing overvalued, high momentum stocks in ‘popular’ segments of the market.”
Coulon said that while demand growth in commodity markets is still some way off the highs of the early 2010s, prices have recovered from the lows seen in 2014-16 when marginal producers were forced out.
“After having been cut to the bone in the downswing, preventative repairs and maintenance and replacement capex spend has returned,” he added.
“Additionally, amongst the ASX listed suppliers of these services, there has been a meaningful retrenchment in industry capacity during the downturn.
“Global growth headwinds from the US’ trade wars is a concern for end market commodity demand but the Chinese Government’s stimulus measures to prop up growth in GDP is supportive with continued increases in resource intensive infrastructure spending.”
“Examples at the smaller end include Austin Engineering (ASX:ANG) and GR Engineering (ASX:GNG),” Coulon said.
Austin is a leading manufacturer of truck trays, bucket bodies and other mobile plant capital items.
“Its balance sheet is stronger than it has ever been, it has valuable intellectual property and yet on our numbers it trades on a mid-single digit forward EBIT multiple and a very modest premium to NTA,” he added.
Coulon told Stockhead that it was attractive given its status as a global manufacturer of high performance mining attachment products supported by design excellence.
“With an increased focus on operational efficiency by miners, ANG is well placed to convince miners of the returns available from investing in ANG products vs. OEM [original equipment manufacturer] products,” he said.
“While demand for their products can be volatile, downside risks appear manageable with the balance sheet now robust after a period of repair (well under 1x EBITDA) and the company now in the hands of a highly credentialled board and management team.
“Valuation is where the story really gets interesting with the stock barely trading above NTA and on a mid-single digit FY20 forecast EV/EBIT multiple.”
GR Engineering is a leading engineering design and construction business, particularly in metalliferous process plants. It also has a strongly performing oil and gas maintenance business and $30m of net cash on its balance sheet.
“While it has had a lean patch in construction revenue due to project deferments, recently we see it very well placed to grow earnings substantially given it is the selected contractor for multiple projects in the gold, base metals and mineral sands space,” Coulon said.
“At the larger end Monadelphous Group (ASX:MND) is well placed to benefit from iron ore capex,” he said.
Coulon said that Monadelphous is the premier mining construction player in the Australian market with an envious record of operational execution for clients and cashflow generation for investors.
“While the valuation at first blush may not appear overly cheap, the stock is a prodigious cash generator and enjoys excellent returns on invested capital. Relative to a very expensive market MND still represents good value in our opinion.”
Oliver Coulon is the Deputy Portfolio Manager for Spheria Asset Management, a fundamental-based investment manager with a bottom-up focus specialising in small and microcaps. He has over 13 years of experience analysing smaller companies in Australia and New Zealand.