Treasure Chest: Mining Services Undervalued

This story features NEWCREST MINING LIMITED, and other companies. For more info SHARE ANALYSIS: NCM

Jarden believes mining services stocks are undervalued while Credit Suisse initiates coverage of mining and mining services company Mineral Resources.

By Greg Peel

Whose idea is it?

Analysts at Jarden and Credit Suisse.

The subject (1):

Jarden believes the market is currently undervaluing mining sector contractors.

Jarden analysts note mining services companies and the mining companies they service are both trading at lower valuations than their through-the-cycle averages over the previous commodities cycle.

Jarden compares service companies with a specific basket of mining stocks that it believes experienced similar commodities cyclicality to the broker’s mining services coverage. The basket contains Newcrest Mining ((NCM)), OZ Minerals ((OZL)), Iluka Resources ((ILU)) and AngloGold Ashanti ((AGG)).

In the previous commodities cycle, this basket traded at a 53% price/earnings (PE) premium to mining services, but that premium is currently only 3%.

While broadly lower valuations in both types of mining stocks may be reflective of a lower returns environment this cycle, the broker also thinks the market is failing to capture higher forecast earnings growth for mining services relative to mining companies, which has led to relatively poor mining services sector share price performance.

This higher growth means mining service stocks are trading at a price/earnings growth (PEG) multiple of only 1.6x, compared to 12.7x for mining stocks.

Noting that Jarden employs a five-tier rating system (Buy, Overweight, Neutral, Underweight, Sell), the broker has a Buy rating on Emeco Holdings ((EHL)) with a $1.50 target, Buy on Macmahon Holdings ((MAH)) with a 25c target, Neutral on Monadelphous Group ((MND)) with a $10.10 target, and Overweight on NRW Holdings ((NWH)) with a $2.50 target.

These stocks are not covered extensively by FNArena database brokers, and the brokers that do cover the stocks have not updated forecasts since the February result season.

To that end, Macquarie has an Outperform rating on Emeco and Ord Minnett a Buy rating, for a consensus target price of $1.32.

Macquarie is Outperform on Macmahon with a 30c target.

Five brokers cover Monadelphous, for two Buy (or equivalent) ratings and three Hold. Consensus target $11.40.

Macquarie is Outperform and UBS Buy on NRW, with a $2.40 consensus target.

The subject (2):

Credit Suisse has initiated coverage of Mineral Resources ((MIN)) with an Outperform rating and a target price of $73. Mineral Resources is both a mining services company and mining company.

The core mining services division offers services to blue chip miners and has been characterised by industry-leading retention, growth and margins, and also offers services to its own mining divisions of iron ore and, more recently, lithium. The company has now moved into gas as well, which Credit Suisse suggests could become a fourth pillar.

Lithium alone could justify Mineral Resources’ current share price, the broker suggests, given the excitement being generated over EV demand growth. The company’s own iron ore exposure remains key to driving mining services volume.

Credit Suisse values the stock using a sum-of-parts model for mining services, and a discounted cash flow model for commodity exposure.

In initiating with a Buy-equivalent rating, Credit Suisse joins four other FNArena database brokers with Buy or equivalent ratings for Mineral Resources, with a fifth (Ord Minnett) currently on research restriction.

The consensus target, including Credit Suisse on $73.00, is $69.75.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms