A couple of weeks ago, ALS, the big laboratory and mineral testing group cut its first half profit forecast in something of a surprise.
ALS balanced on September 30 and reports its (lower) first half profit on November 11.
Its shares dropped sharply on the day.
ALS hasn’t provided a forecast for the full year till March 31 next year, but presumably its internal targets have been cut since the downgrade.
It was news that confirmed to many in the market that the enormous squeeze on mining service companies still had a way to go.
Yesterday the much smaller Titan Energy Services (TTN) cut its profit forecast for the year to June 30 next year.
But the market reaction was staggering – the shares lost 30% in value very quickly, there was a brief halt to trading and when it resumed, down they went again, taking the day’s losses to well over 60%, an almost unheard one day fall.
TTN 1Y – Mining services still under considerable pressure
Even though the downgrade halved estimated 2014-15 profit, the self off was an overreaction, unless investors reckon there’s worse to come.
Some unkind souls were discussing Titan’s situation in terms of the collapse of the Forge group in late 2013 after it struck problems with a couple of contracts.
Following a couple of contract losses or changed terms Titan said it now expected to report a year to June pre-tax profit of just $10-$12 million.
Less than two months ago, it forecast a pre-tax profit of $21 million, up 14% year on year.
The shares ended down 67% to 56.5 cents.
At the start of trading yesterday Titan was a $200 million company – by the close yesterday it was worth an estimated $48 million.
“The CSG market is transitioning from the high growth, start-up phase that we’ve experienced for the past three years, into an operation and production phase,” Titan’s CEO, Jim Sturgess told the ASX in a statement.
“We’re seeing an easing of growth and more competition in the market for services which will impact future contract pricing. At the same time, there are new opportunities as the major producers are looking to consolidate suppliers, expand scope of works and contract terms. TTN is well positioned to respond to this market shift with a targeted sales strategy and, as always, an eye towards growing and acquiring complementary businesses that will meet the industry’s needs.”
Mr Sturgess said that the two RCH camp terminations would have a flow on impact to Titan’s catering (Nektar) and water/waste (BASE) businesses in the short term.
“While the demand for our services remains robust in the Queensland market, it will take time for our sales pipeline in other markets to respond in the short term. We have also considered the likely impacts of our clients seeking costs savings in their operations as they move to first gas and therefore have reassessed margins in both Nektar and RCH. The combination of these changes, the flow on impacts, and Atlas staff carrying costs will have a significant effect on the first half result.”
Hofco is trading ahead of last year and developing new opportunities for growth.
As a result of these business and market changes, Titan is implementing a plan to consolidate its second half position:
- Enhanced sales capacity in South Australia. We have recently undertaken a sales mission into the Cooper Basin and were very encouraged by the opportunities identified. Sales personnel will be deployed in SA to sell all Titan services. Other sales efforts will continue in WA and NT.
- Continue to build the accommodation services pipeline. BASE and Nektar will employ dedicated sales personnel this year, no longer relying solely on RCH for their lead generation.
- Accelerate plans to consolidate support functions into a shared services structure and a further review of overhead costs.
- Continue to consider organic and acquisition opportunities that fit our growth strategy.
Christine Hayward, Titan’s new CFO said “Given the rapid expansion of the Group, it’s appropriate to conduct a review of all costs and operating structures. Whilst the recent developments within our business are challenging in the short term, we are encouraged by a number of significant current and upcoming tenders across our business units.”
"TTN’s focus over the next few months will be to reposition the business for improved sales lead generation and a more cost effective operating structure. In light of the recent changes we expect a full year EBIT of $10m – $12m1. We will update our position at the half year. "
