And still they tumble out – shock downgrades from the already downgraded mining services sector. It’s getting bloodier and yesterday WorleyParsons (WOR), one of the sector’s major players, shook confidence with a sharp and surprising earnings downgrade for the current half and full year.
The update saw the shares sold down by more than a quarter yesterday as investors also queried the ability of the company to produce a forecast solid second half performance to offset the damage from an expected 20% to 30% plus slide in first half profits.
WorleyParsons’ warning adds to what is already a miserable month for the mining and resources services sector.
This month we have already seen warnings from the likes of Monadelpheous (muted), Forge (with more to come), Ausdrill, Emeco and Boart Longyear.
On top of that there was an update from chemicals mining services group Orica that was seen as positive, but will now come under question, and a weak result from fellow explosives maker Incitec Pivot which wasn’t seen as a downgrade, more an acknowledgement that times are uncertain in the sector.
And, next week we get the interim result from the huge testing group, ALS (the old Campbell Brothers), which is intimately linked to the health of the mining sector (as well as the water and the environmental industries here and in the US).
ALS is seen as one of the key barometer stocks for the mining services sector.
And so is WorleyParsons group which works across the mining and energy sectors here and offshore. It is one of the global giants in the resources services sector.
After its surprise downgrade in May, the company seemingly convinced the market with its 2012-13 profit result (and guarded optimism) and then at the AGM in October with suggestions that the outlook for the sector had steadied, with a modest rise in profit forecast for 2013-14, thanks to hopes for a stronger second half (but after a lower first half, compared to the same period in 2012-13).
Yesterday that became a sharp downgrade and the weak first half is going to be much weaker than previously thought, and meeting the lowered full year target will depend on a much stronger second half.
WorleyParsons’ warning adds to what is already a miserable month for the mining and resources services sector.
The company is looking at a first half profit fall of up to 30% or more, and a full year fall of 20% at best.
As a result of shock announcement, the shares plunged more than 25% or a huge $5.59, to close at the day’s low $16. They will probably go lower in coming days as brokers rework their estimates.
It was in fact the second surprise downgrade this year from the company – the downgrade in May produced a similar market reaction. Yesterday’s was much more violent though.
The company told the ASX yesterday that it now expects the year to June net profit to run at $260-300 million, which is well short of the recent forecast of $322 million. That is the profit could be 15% to 20% lower for the full year.
"At the Company’s Annual General Meeting WorleyParsons reiterated guidance for FY2014 of increased earnings compared to FY2013 net profit after tax (NPAT) of $322 million," the company said.
"After considering our current trading results and having experienced a delay in upturn in our markets the company is issuing revised guidance. On current indications the company now expects to report underlying NPAT for FY2014 in the range of $260 million to $300 million with first half underlying NPAT in the range of $90 million to $110 million." The company earned $155.1 million after tax for the first half of 2013-14, so the fall will be a significant 30% or more.
In the update, WorleyParsons blamed the new downgrade on a "delay in [the] upturn in our markets".
While the December half net profit is expected to run at $90-100 million, to reach the new full year estimate of around $260 to $300 million, would mean a sharp improvement in the second half on this year’s second half figure of $167 million, which seems to be a big ask at the moment.
That’s also when the benefits of a cost-cutting campaign will start appearing, or so the company hopes.
The problem is that the better-than-expected performance in the US, Europe and southern Africa will not be enough to offset the weakness in Australia and Canada, despite these cost-cutting efforts, it said.
And, in the Middle East there’s also been a number of project delays which have resulted in a "slow start to the year", while the Latin American market has also been hit by the downturn in minerals and metals markets, it said.
WorleyParsons said the revised outlook primarily reflects a "reduced professional services revenue compared to the prior year. This reduction is particularly evident in the company’s large Australian and Canadian businesses and to a lesser extent in Latin America and the Middle East
"The decline in the Australian business has been greater than expected, as hydrocarbons projects in Northern Australia move into the final construction and delivery phase and the Minerals & Metals business remains weak."
CEO Andrew Wood, attempted top put the best possible spin on the revised outlook, saying: “Notwithstanding the impacts weaker than expected market conditions are having on our performance, the cost reduction program we are implementing together with the momentum from recent contract awards should position us for medium term growth.
"The diversity of our business in terms of its geography, industry sector and service offering remains a fundamental strength."
And a lot of faith in the forecast of a strong second half improvement is also a "fundamental strength".
