Why Calibre Group soared 18% in a day

Calibre sets the tone for mining contractors this reporting season.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published August 19, 2013 10:27 am AEST

Mining services contractor Calibre Group (ASX: CGH) soared nearly 19% on Friday, as the company beat its most recent earnings guidance.

Revenue increased by 27% to $711.3 million, above guidance of $680-$695 million, however, underlying earnings dropped 20% to $75.2 million, and net profit after tax and other adjustments dropped by 22% to $36.3 million. Both earnings and profit beat the company's most recent guidance and resulted in the share price jumping to a 4-month high of $0.51.

Calibre has traded between $1.65 and $0.26 in its first year since its initial public offering (IPO) at $1.63 in August 2012. It was one of the first to announce to the market the expected effect on profit of the slowdown in mining construction spending. In mid April, the share price plunged by more than 65% over three days in response to the announcement.

Due to the lower profit, a small final dividend of 1.8 cents was declared, taking the full-year dividend to 7.6 cents, partially franked. This represents a yield of 15% based on the current share price, however it's doubtful that the payout will remain the same next financial year as the mining construction boom recedes.

Calibre's chairman Ray Horsburgh highlighted the importance of cost reduction measures put in place during the past financial year, which has positioned the company to remain competitive to maintain earnings in FY14. The initiatives included reducing the workforce by 70 in order to achieve cost savings of $25 million for FY14.

Additionally, Calibre's management team has attempted to transition from asset creation to asset management to better weather the slowdown in mining construction spending. Asset management accounted for 41% of group revenue in FY13, compared to 10% in FY12, and the company has forecast that it will account for around 53% in FY14. Increasing recurring revenue streams will be a dominant theme for the company if it is to maintain earnings in coming years.

Foolish takeaway

Calibre beat its revised earnings guidance on the back of recent strength in the iron ore price and ongoing cost savings initiatives. With its share price still 70% below its IPO price and neutral guidance given for FY2014, there may be short term upside in the share price if the iron ore price remains high and the asset management side of the business continues to grow.

Key risks include a drop in the iron ore price and associated delay or cancellation of key projects. The company has sizeable cash and debt facilities to grow via acquisitions as mining services contractors consolidate during the coming low-growth phase.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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