What: Cardno Limited (ASX: CDD) shares rose on Tuesday morning after the company announced net profit after tax of $31.5 million for the six months to 31 December 2014, at the top end of the revised guidance issued in November. The result was above that expected by some analysts which has pushed the share price up today.
So What: It goes without saying that it's pleasing that the company was able to hit the guidance provided only a month earlier, however the result was 19% lower than the prior comparative period (pcp) result adjusted for one-offs.
The highlights of the result were:
- Gross Revenue was $686.1 million, up 8.4% on the pcp
- Fee Revenue was $502.4 million, up 7.8%
- EBITDA was $63.2 million, down 15.2%
- Basic earnings per share were 19.2 cents, down 35.5%
- Fully franked interim dividend of 13 cents per share, down 32%
Cardno's result is another signal that times are getting tougher for mining services companies. Bradken Limited (ASX: BKN) reported a similarly disappointing set of results last week and analysts aren't expecting much from NRW Holdings Limited (ASX: NWH), Macmahon Holdings Limited (ASX: MAH) or Ausdrill Limited (ASX: ASL).
What Now: During the mining boom, the demand for mining services companies was such that contractors could essentially name their price, placing the mining companies at their mercy.
The situation has now reversed and the mining companies are setting the prices after a competitive tender process between multiple desperate services groups. This is compressing margins and will drive smaller, less efficient operators out of existence.
Larger operators such as Cardno should survive, and indeed Cardno's management notes that the backlog for the group is now at record levels, in excess of $1 billion with almost three quarters of this due to be delivered in the next twelve months. The downside is that much of this work (60% of group revenue) is in the US and that margin pressure remains an issue both in Australia and abroad.
Investors should consider investing in industries that have more favourable long-term prospects. Companies that require lower investment in hardware are certainly appealing in this age of rapid obsolescence.
