Be selective
We believe companies servicing the resources and mining
infrastructure sectors have been indiscriminately sold. With
earnings growth above 20% pa, we argue the sector provides
selective opportunities. Our top picks are TSE, WOR, AAX, CPB and
Key recommendations & forecasts
Reuters Year end Recom Price Target
price
Upside/
downside
EPS
1fcst
P/E
1fcst
Transfield Svcs¹ TSE.AX Jun 2008 Buy A$10.86 A$13.80 27% 0.60 18.0
WorleyParsons¹ WOR.AX Jun 2008 Hold A$32.51 A$42.00 29% 1.45 22.4
Ausenco¹ AAX.AX Dec 2008 Buy A$13.25 A$15.22 15% 0.69 19.1
Campbell Bros¹ CPB.AX Mar 2008 Buy A$23.64 A$35.86 52% 1.39 17.0
Cardno¹ CDD.AX Jun 2008 Buy A$5.40 A$8.11 50% 0.44 12.1
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Source: Company data, ABN AMRO forecasts
Resources and mining infrastructure have not escaped…
Companies servicing the resources sector have pulled back at a rate greater than the
general market downturn as they became easy victims of profit-taking and a PE
derating trend. Many stocks have shed more than 20% of value and the sector-wide
derating has resulted in the average 12-month forward PER falling from 17x in
November 2007 to below the 10-year average at 12x as at March 2008. We note the
price depreciation has not been strongly correlated with a company's PER.
… despite growth outlook looking as strong as ever
Companies servicing the resources sector continue to enjoy unprecedented demand
as a result of China's rapid industrialisation and hence strong demand for resources.
Order books and margins are at record levels and we expect the favourable operating
environment to continue for at least three to five years. Our earnings growth
forecasts remain above 20% pa, for some. Most companies have low gearing
positions, and significant capacity for expansion capex and acquisitive growth.
We undertake a comparison across the sector
This note evaluates key fundamentals including earnings growth, valuation multiples,
margins, cash flow, gearing and liquidity. In the short term, share prices are likely to
continue to be impacted by market volatility, negative sentiment in the US and lower
liquidity in small-cap companies. There is potential for project funding concerns and
the impact of any major project deferral on sentiment. However, for most projects,
elevated commodity prices continue to deliver robust project NPVs. Our medium- to
longer-term view is that quality mining services companies with strong earnings
visibility will be rerated up to FY09 PE multiples in the mid-teens.
Stand-outs in the sector include TSE, WOR, AAX, CPB and CDD
Given the current volatility and an inherently cyclical industry, we look for diversified
earnings sustainability, scale and a differentiated service. Our key picks in the sector
include TSE (services, minimal construction risk), WOR (exposure to oil and gas),
AAX (mining), CPB (global, environmental) and CDD (diversified sectors).
Produced by: ABN AMRO
Morgans Ltd
ASX All Ordinaries: 5401.20
S&P/ASX300 Cap Goods: 7697.29
Overweight
Sector relative to market
Sector performance
(1M) (3M) (12M)
Absolute -468.1 -2059.7 -929.2
Absolute % -5.7 -21.1 -10.8
Rel market % 0.3 -6.2 -2.3
Source: Bloomberg
www.abnamroresearch.com
Analysts
Tamara Stretch
+61 7 3334 4504
tstretch@abnamromorgans.com.au
Chris Sleep
+61 2 8259 6563
chris.sleep@au.abnamro.com
Roger Leaning
+61 7 3334 4554
rleaning@abnamromorgans.com.au
Aiden Bradley
+61 2 8259 5847
aiden.bradley@au.abnamro.com
Simon Thackray
+61 2 8259 5090
simon.thackray@au.abnamro.com
Ross MacLeod-Carey
+61 7 3334 4516
rossmc@abnamromorgans.com.au
Richard Johnson
+61 2 8259 5947
richard.j.johnson@au.abnamro.com
Greg Goodsell
+61 2 8259 6869
greg.goodsell@au.abnamro.com
ABN AMRO Equities Australia Limited, ABN 84 002 768 701, AFS Licence 240530
Level 29, ABN AMRO Tower, 88 Phillip Street, Sydney NSW 2000, Australia

Executive summary
Economic growth in China, a primary driver of demand for commodities,
remains underestimated and the impact of a weaker US economy for China
appears limited, in our view.
The robust resources and mining infrastructure sectors continue to fuel growth
forecasts for the specialist service companies. We believe this market downturn has
introduced value to the sector, for which the outlook remains buoyant for at least the
next three to five years.
The engineering and construction services sector was trading at record multiples
(17x) in November 2007, but has been rerated in recent months back below the 10-
year sector average of 12x (as at March 2008), which we believe represents good
value given the growth outlook.
In the short term, we expect share prices to continue to be impacted by the high
market volatility, negative sentiment continuing in the US and lower liquidity in small
mid-cap companies. Our medium- to long-term view is that quality companies
servicing the mining sector with 20%-plus pa growth forecast will be rerated back up
towards PE multiples in the mid-teens, and some beyond.
We analyse more than 20 companies across the sector, highlighting differences in
sector exposure, geographical reach, order book, margins, capital and labour
intensity, gearing and earnings growth forecasts.
Given the current market environment we prefer companies that are least exposed to
the US and tightening credit conditions, hold solid order books with a sustainable
earnings profile, have a solid track record, have quality management, and are trading
at an unwarranted discount to peers or our target price. Our key picks are as follows:
Engineering
■ AAX – Net cash position, specialist service provider, global presence, high margin,
high ROE and ROA.
■ WOR – Leverage to oil and gas services, global, strong growth profile.
■ CDD – Attractive fundamentals, low gearing, strong cash flow, more
infrastructure-related (small mining exposure), highly acquisitive.
Construction
■ MAH – Order book visibility, 20-30% pa growth profile, low debt, strategic
partnership with LEI (construction only); leveraged to mining and infrastructure
sectors.
■ LEI – Liquidity, large diversified order book, market leader, emerging
opportunities overseas.
Services
■ CPB – 20-40% pa growth, global management system, high margin, resources
and environmental sector exposure.
■ TSE – Services business, ongoing revenue streams, general alliance contracts,
minimal construction risk, strong cash flow.