Sedgman’s profits down 75.1%

Sedgman's profits down 75.1%

Yet another sign of ongoing mining tightening.

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published August 26, 2013 10:20 am AEST

The resources industry provider of projects and operational services Sedgman (ASX: SDM) has hit a bump along the road, as it waits for mining to pick up over the near term. Revenue was down 24% from $590.6 million to $448.9 million, and net profit plummeted 75.1% from $37.85 million to $9.43 million.

The company attributed the depressed revenue mostly to the harsher business environment, with a slowdown in projects available during the current cyclical mining downturn. In addition, some works have been delayed as customers' projects are held up in obtaining environmental approvals.

Three factors made the fall in earnings worse. First, there was a $6.4 million write-down by impairment for equipment to recoverable value. Next, a $7.6 million impairment charge against receivables was brought on for money owed predominantly from Discovery Metals. Last, redundancy costs of 120 employees came to $2.99 million. In all, these costs totalled $16.99 million.

The results presentation stated that the company is looking to a weaker Aussie dollar to provide relief, and for the passing of the national election to help get business flowing again. It is thought that many companies are holding off on capital investing and projects until the election is out of the way and clearer forward planning can be done.

With lower earnings, return on equity was 5.3% when in past years it regularly was in the high teens and twenties. Net profit margin of 2.1% also shows how much earnings have been compressed, aside from the lower revenue. When the mining industry is going cold, this company, as well as other mining service companies like Macmahon Holdings (ASX: MAH) and Coffey International (ASX: COF), can tumble very quickly unless they are highly diversified in geography and service offerings.

Sedgman's gross gearing is quite low — 15.16% — and a strong current ratio of 2.32 mean that it should be able to weather the storm. If the economy stays tight, it will have to.

For investors, this company's returns won't be very satisfying. If the economy stays tight, look for consolidation in the industry, and see which companies fare the best. They will be the ones that will rise when higher mining levels resume.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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