Just over a month ago, Boart Longyear, a provider of drilling services to miners, profit warned and expected FY13 EBITDA to be at the low end of the consensus range of US$199-271mn. Today, the company has warned AGAIN and said FY13 EBITDA should be BELOW the revised consensus range of US$176-211mn, i.e. below US$176mn which is already -25% from the mid-point of the range before the first warning. Management also said conditions continue to soften. Being heavily exposed to exploratory activities, Boart is in a tough spot given junior miners are going to the wall and large mining businesses are being ruthless on costs, especially anything related to exploration. The slowdown has shocked even industry insiders as evidence by this second warning in six weeks.
This has a negative read for the Testing stocks also; business activity in the mining portions of their commodity business lines is clearly deteriorating more rapidly than industry players expected. Looking at a breakdown of SGS’s minerals activity for example, it’s clear a large part (at least half) is related to exploration, resource development, pre-feasibility and pre-production. These are all areas where we should expect demand to drop very heavily over the Next 12 months or so. Intertek, at its IMS on 17 May, told the market that mining activities had declined more sharply than they expected with some price competition, leading to a decline in GROUP margins YoY. It sounds like this is getting worse.
Mining might make up a small proportion of group sales and profits (5-17%) for BV, Intertek and SGS, but the scope of the cuts in mining is enough to hurt margins. The margin expansion the street expects for FY13 could be brought to a halt, while all the stocks are trading above their 10y PE multiples for Y2 PE, BV 18x (16x avg), Intertek 18x (16x avg) and SGS 18.5x (18x avg). Next report is SGS on 17th July, which has the highest commodity exposure, 17% of EBIT. We remain trading sellers until consensus downgrades have been put through.