General | Feb 04 2006
Despite increasing volatility in commodity prices spending in the mining sector remains strong, at the same time as non-residential construction continues at high levels thanks to a continual stream of new infrastructure projects.
One way investors can benefit from this is via the equipment hire sector, which ABN Amro continues to view favourably even after it has outperformed the broader market by more than 10% in the past 12 months.
The broker estimates solid growth is likely to continue in coming years, though the rate of growth is unlikely to match that of the past few years. It expects this growth will come from both infrastructure and mining related work, a positive as it means exposure is not limited to one sector of the economy.
Another source of earnings upside in the sector is consolidation, with ABN Amro noting this has been a feature of the past year and has given a boost to both sales growth and margins.
Other reports have been equally positive on the outlook for the sector but over different time frames, with BIS Shrapnel looking for strength in FY06 and FY07 but more difficult conditions beyond that, compared to the Construction Forecasting Council’s estimates of growth strengthening in FY09 and beyond after a more difficult coming couple of years.
Australian stocks with exposure to the sector that are rated as Buy by the broker include Coates Hire (COA), PCH Group (PCG) and Tutt Bryant (TBG), the latter two trading on fairly attractive Price/Earnings (P/E) ratios and Coates looking good on a Price/Earnings growth measure. The broker has lifted its share price target on Coates to $6.60, an increase of almost 10%, while its valuation on PCH increased after the company’s interim profit result and it expects Tutt Bryant will report earnings above prospectus forecasts.
Across the Tasman the broker rates Hirequip NZ (HQP.NZ) as Buy, as it expects the strong management team to take advantage of the company’s dominant market position in the New Zealand hire business.
Coates Hire is the only one of the stocks to be broadly covered in the Australian market, the FN Arena database showing it is rated as Buy by three brokers and equity researchers, compared to four Hold ratings and one Underperform recommendation.
