In its annual review of Australian-listed service providers, EY said the cost cutting and productivity push from mining companies continued to create tough conditions for contractors.
The number of services companies dropped 8% in financial year 2014, with companies exiting the index due to failure or merger/acquisition.
“With total debt for mining services companies still at historical highs, and capital investment by the mining sector forecast to fall a further 10% in FY15, conditions are only going to get tougher for those in this sector who are unable to adapt,” EY Oceania restructuring leader Vince Smith said.
EY analysis showed a widening valuation gap between diversified and specialised contractors, with the diversified companies outstripping their competitors.
“Diversification provides resilience against the increasing volatility, with a perception of lower risk, and it is clearly being rewarded in the market,” Smith said.
“Mining services companies that have strengthened their balance sheets and innovated to differentiate themselves are well positioned – but the tough times will continue for the rest.”
With relentless pressure on the sector to reduce costs, achieve scale and invest in innovation and productivity, EY Oceana mining and metals transaction leader Paul Murphy said there was likely to be more merger and acquisition activity on the horizon.
“Conditions have been ripe for industry consolidation and M&A in the sector for a few years now and we are only now starting to see activity,” he said.
“We believe we are on the cusp of consolidation in FY15 given the need to diversify, and leverage size and scale.”
Of the seven companies removed from EY’s list last year, three entered external administration and four were acquired or merged into other entities.
Most listed companies were diversified into infrastructure, utilities and commercial and government projects, providing exposure to broader trends beyond the mining sector.
Despite the tough conditions, the total market capitalisation of mining services companies increased 7% last year.
The performance compares with a 15% rise in the market cap of the Australian Securities Exchange All Ordinaries index.