Market valuations for the Australian mining services sector are on average 34 per cent too high, according to Morningstar.
The research house says the market has “unreasonably” priced for double-digit revenue growth in the coming five years, putting it above the levels seen in the 2013 China boom as early as 2020.
“We struggle to credit such a bullish scenario given the most commodities-intensive phase of China’s development has already passed and government coffers are not limitless,” the research house cautioned.
Morningstar forecast annual revenue growth for mining services sector companies at 4.5 per cent by fiscal year 2021, and earnings before interest, taxes, depreciation and amortisation slightly higher – supported by “aggressive cost-outs and industry deflation” – at 6.4 per cent over the same time.
Two-thirds of the mining services sector’s earnings are supported by the mining and energy industries and investment activity in these industries is unlikely to bottom out until 2018, Morningstar said.
“Even then, expect only a modest turnaround, well below what the market is pricing in. Instead, we view growth stemming from increased maintenance activity, rising public infrastructure spending unrelated to mining and energy.
“We believe the market overestimates the likely improvement in commodity investment.”
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