Company Overview: Monadelphous Group Limited (ASX: MND) is a leading Australian engineering group involved in some of Australia’s biggest and most complex projects and facilities. The company mainly provides construction, maintenance and industrial services to the resources, energy and infrastructure sectors. Headquartered in Perth, Western Australia, MND operates offices in Brisbane and Queensland. Further, it also operates workshops across Australia and in New Zealand, Papua New Guinea, Chile, China, Mongolia, and the United States of America. The company’s vision is to achieve long-term sustainable growth by being recognised as a leader in its chosen markets.


MND Details
 
  
 
Making Progress Towards Growth Strategy: Monadelphous Group Limited (ASX: MND) is a leading engineering group in Australia which is primarily involved in providing construction, maintenance and industrial services to the energy, resources and infrastructure sectors. The company has two operating divisions − Engineering Construction, and Maintenance and Industrial Services. The company operates predominantly in Australia, with overseas operations in New Zealand, China, Papua New Guinea, Mongolia, the United States and the Philippines. The company’s growth strategy is to grow its earnings by maximising returns from its core markets, building its infrastructure business and delivering core services to overseas markets. Last year, the company made a good progress towards its growth strategy as it was awarded a significant number of new major construction and maintenance contracts. 


Last Five-year Performance (Source: Company Reports)

Looking ahead, the company’s short-to-medium term financial performance is dependent on the extent and duration of the impact of COVID-19 on the company’s operational activities and productivity levels. To ensure that the company operates as productively and profitably as possible, MND has implemented a large number of actions to protect the business, including the implementation of a targeted cost reduction plan across the business. In the long run, the resources and energy sectors in Australia are expected to provide a solid pipeline of opportunities over the coming years as more favourable market conditions return.

FY19 Results Highlights: During FY19, the company’s Maintenance and Industrial Services division achieved a record annual revenue of $998.4 million, up ~19% on the previous year, underpinned by the continued growth in oil and gas activity levels coinciding with strong demand for its services in the resources sector. 

The Engineering Construction division reported revenue of $622.9 million in FY19, down on the previous year, reflecting subdued activity levels in the resources construction market, offset by growth in the renewable energy and water businesses. Over the year, the company also strengthened its position in infrastructure, with revenue growth achieved in both the water and renewable energy markets. For the full year, the company delivered Underlying NPAT of $57.4 million and reported NPAT of $50.6 million.

The company was awarded approximately $1.35 billion in new contracts and contract extensions since the beginning of FY19, including approximately $400 million of new contracts subsequent to year-end, kicking off a promising start to the 2020 financial year.
 
H1FY20 Results Highlights: For the first half of FY20, the company reported revenue of $852 million, up 2.6% on pcp. Over the half-year period, the company saw strong performance from its Maintenance and Industrial Services division, which achieved a record half year revenue of $584.5 million, up 16% on pcp. The Engineering Construction division reported revenue of $273.4 million in H1FY20, down by 17.6% on pcp, mainly due to the delays in the commencement of a number of construction projects.

Over the half-year, the company secured major construction contracts at Rio Tinto’s West Angelas Project and at Albemarle Lithium’s Kemerton lithium hydroxide plant. Further, the company made a number of strategic acquisition investments during the period totaling $14.3 million, in line with its markets and growth strategy. These investments are enabling the company to expand the breadth of services provided to customers in the coal seam gas and rail sectors and facilitating the expansion of core services into South America. For the half-year, period, the company declared an interim dividend of 22 cents per share fully franked. 


H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 29.06% of the shareholding.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s net margin stood at 3.7%, higher than the industry median of 2.7%. The company has an asset turnover ratio of 1.10x, higher than the industry median of 0.35x. The company has a ROE of 7.2%, higher than the industry median of 4.2%. MND has a current ratio of 2.05x, higher than the industry median of 1.08x, demonstrating that it is well equipped to pay its short-term obligations. 
 

Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of Paying Dividend: Over the past several years, the company has continued to pay regular dividends to its shareholders. For FY19, the company paid a total dividend of 48 cents per share fully franked, representing a dividend payout ratio of approximately 90% of reported NPAT. For the first half of FY20, the company declared a dividend of 22 cents per share (fully franked), down by 12% on pcp. 


Dividend Record (Source: Company Reports)

Key Risks and Challenges: The company’s short-to-medium term financial performance is dependent on the extent and duration of the impact of COVID-19. The high levels of competition, price sensitivity and customer expectations for cost competitive delivery will drive demand for productivity improvements and will continue to challenge margins. Further, the expected increase in industry activity is likely to create additional pressure in the employment market and presents challenges with respect to the attraction and retention of labour.

Change of Director’s Interest: Recently one of the company’s Director, Robert Velletri, acquired 13,106 ordinary shares in the company via vesting and exercise of performance rights. Robert Velletri now indirectly holds 2,119,776 ordinary shares and 19,545 performance rights of the company.

Secured Contracts in The Resources and Energy Sectors: On 1 June 2020, the company announced that it has secured a number of construction and maintenance contracts in the resources and energy sectors with a combined value of around $150 million. It secured several contracts in the iron ore market and has been appointed to BHP’s WAIO Site Engineering Panel for a further term of two years, to provide civil, structural, mechanical, piping and marine services at BHP’s Mine Site and Port Operations in the Pilbara. Further, the company has been awarded a new three-year contract to provide minor capital project services at Newcrest Mining’s gold mining operations on Lihir Island. It has also secured a four-year contract to continue providing mechanical and electrical maintenance and turnaround services in the Queensland coal seam gas market.

Covid-19 Update: Due to Covid-19 restrictions, the company has witnessed delay, suspension, deferral or reduction of services across a range of its projects and worksites. In response, the company is taking the necessary measures required to proactively manage the business through the current challenging period.

What to Expect: Before the escalation of Covid-19, the company forecasted around 10% revenue growth for FY20. However, due to the significant level of uncertainty relating to the impact of Covid-19, the company withdrew the guidance. If the activity levels that the company is currently experiencing continue to the end of FY20, the revenue for FY20 would be similar to that of the previous corresponding period. Disruptions due to Covid-19 are expected to impact the company’s margins in H2FY20.

To ensure that the company operates as productively and profitably as possible, MND has implemented a large number of actions to protect the business including the implementation of a targeted cost reduction plan across the business. 

In the long run, the resources and energy sectors in Australia are expected to provide a solid pipeline of opportunities over the coming years as more favourable market conditions return. Further, the demand for maintenance services is expected to be strong as production rates in the resources and oil and gas sectors remain at record levels. With a decent balance sheet, the company is well-placed to invest in suitable future business opportunities.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of MND has corrected by 35.04% on ASX and is inclined towards its 52 weeks low price of $8.00, offering a decent opportunity for accumulation. The company has an annual dividend yield of 5.18%. Although, the company’s operations and performance are dependent on the extent and duration of project and supply chain delays resulting from the outbreak of the coronavirus, the company’s industry leading position and its long-standing commitment to the delivery of safe, reliable and cost competitive services, has placed it well to capitalise on the opportunities and deal with the challenges ahead. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). Considering the aforesaid facts, decent market outlook, recently secured contracts, performance in H1FY20, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $10.880, up by 0.648% on 2 July 2020. 

 
MND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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