Services sector does it tough

No respite for contractors

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 14, 2013 4:00 pm AEST

Over the past year, the S&P / ASX 200 Index (Index:^AXJO) (ASX:XJO) has climbed more than 22%, not a bad return at all, but things aren't so bright in the services sector.

United Group's (ASX:UGL) shares have seen the biggest fall over the past twelve months, losing 43.6%. But shareholders could see some value emerge, if the company's plans to spin off its property group come to fruition. United Group's boss Richard Leupen also says things may have reached the bottom in the contracting industry with no big project cancellations or deferrals in the last six months.

Similarly, Transfield Services (ASX:TSE) has seen its shares lose close to half their value, ~49%. As part of the company's strategy of cutting costs, more than 600 middle managers have been fired from the group's total workforce of 3,000 in the past 18 months. Transfield has also faced a legal dispute with one of its subcontractors on the National Broadband Network (NBN) project, and then was forced to downgrade its profit forecasts in May this year.

Shareholders in Downer EDI (ASX:DOW) have seen the best performance out of the bunch, with shares rising 14.6%, still well below the index's performance. Downer EDI chief executive Grant Fenn recently told analysts and investors that the group's revenues in 2014 remained uncertain, and that the company would be forced to cut costs in a competitive market. Downer may have taken its bitter pill in 2010 and 2011, when it announced writedowns on its Waratah train project, and underwent a substantial restructuring.

Some analysts have suggested thing aren't about to get any better either, with Simon Thakray at Nomura cautioning that contractors were heading into an extended downward cycle. With the resources boom slowing down, and new mining investment virtually at a standstill, it may be some time before the services industry sees light at the end of the tunnel.

Foolish takeaway

With thin margins, it doesn't take much for services companies to swing from a profit to a loss. Foolish investors may want to give the sector a wide berth in the short-term, until things pick up again.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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