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The cyclicality of resources companies can put many investors off, but Celeste analysts suggest a way to reduce that volatility.
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The last 14 months have been pretty terrible for most S&P/ASX 200 Index (ASX: XJO) shares, but mining has been an exception.
Despite this, some investors shy away from resources stocks.
For many, this aversion is due to their cyclical nature.
Mining shares can swing wildly depending on commodity prices. They require careful monitoring so investors don’t end up mistiming their entry and exit.
But if you still fancy exposure to a sector that carried the Australian market for much of 2022, there is a less volatile way to do so.
Mining services companies provide outsourced labour and equipment to those businesses that actually own the mines.
The stocks for these companies could potentially be more stable than the mining companies themselves, as they’re not dependent on the popularity of any one commodity.
The team at Celeste Funds Management recently pointed out how it’s backing two such companies.
“Monadelphous Group Ltd (ASX: MND) rose 6.6% in March,” its memo to clients read.
“The company announced $125 million of new contracts and contract extensions with work across the lithium, iron ore and LNG sectors in WA, bringing total contract wins in FY23 to approximately $1.1 billion.”
The company also closed its underperforming Buildtek arm, which was a Chilean construction and maintenance services business that they had a 90% stake in.
“The Chilean resources sector has been significantly impacted by COVID, which impacted Buildtek’s financial performance and significantly increased its working capital requirements.”
In the last financial year Buildtek accounted for 5% of Monadelphous’ revenue, so its closure “isn’t expected to have a material impact on net assets or FY23 earnings”.
The Monadelphous shares are 10.8% up over the past year, and are currently delivering a 3.84% dividend yield.
Fellow mining services contractor NRW Holdings Limited (ASX: NWH) has a similar market capitalisation to Monadelphous, but its share price dropped 1.8% last month.
“During the month the company announced the acquisition of OFI Group, a specialist in electrical engineering services and integration, for $4 million,” read the Celeste memo.
“OFI Group has an established history working with NRW’s RCR business and should enhance the capabilities of the METS division with expected FY24 revenue contribution of $40 million.”
The analysts are also bullish on NRW due to its pipeline of work. “NRW announced two new contracts won by the METS division with Fortescue Metals Group Ltd (ASX: FMG) with a total value of $64 million.”
The NRW share price is 14.7% higher than it was 12 months ago. The stock currently pays out a mouth-watering 6.5% dividend yield.
Motley Fool contributor Tony Yoo has positions in Nrw. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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