Company Overview: Monadelphous Group Limited (ASX: MND) is Australia’s leading engineering group providing 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 New Zealand, Papua New Guinea, Chile, China, Mongolia, and the United States of America. The company has two operating divisions - Engineering Construction, and Maintenance and Industrial Services.
MND Details
Committed to Long-Term Sustainable Growth: Monadelphous Group Limited (ASX: MND) is a leading engineering group in Australia providing large-scale multi-disciplinary project management and construction services. Further, the company also specialises in the planning, management and execution of mechanical and electrical maintenance services. MND provides its services to some of the largest companies in the resources, energy and infrastructure sectors. The company’s vision is to achieve long-term sustainable growth by being recognised as a leader in its chosen markets. During the last financial year, the company made decent progress on its markets and growth strategy which focuses on increasing earnings by maximising returns from its core markets, building its infrastructure business and delivering core services to overseas markets. Over a period of FY16-FY20, the company’s revenue has increased at a CAGR of 2.12%.
Currently, the company’s short to medium-term financial performance is dependent on the extent and duration of impact from COVID-19. The company has implemented a swift and decisive response to the outbreak of COVID-19. This includes implementation of a targeted cost reduction plan across the business. Over the coming years, the resource sector is expected to provide a steady flow of opportunities to the company. In addition, the longer-term demand for maintenance services is also expected to grow. With strong forward workload, cost-competitive service solutions, disciplined and prudent financial management practices, the company seems to be well-positioned to capitalise on opportunities and deal with challenges ahead.
Five-Year Financial Summary (Source: Company Report, Thomson Reuters)
FY20 Results Highlights: For the year ending 30 June 2020, the company reported revenue of $1.65 billion, up 2.6% on the previous year. The company’s statutory revenue, which excludes Monadelphous’ share of revenue from joint ventures, was $1,487.4 million in FY20. Due to the economic and social impact of the COVID-19 outbreak, around 10% of the company’s annual revenue has been deferred into subsequent financial periods. Notably, the company’s Maintenance and Industrial Services division recorded annual revenue of $1.05 billion, up 5.1% on the previous year, mainly due to the strong demand for maintenance, shutdown and sustaining capital services within the resources sector, particularly in the first half of the year. The Engineering Construction division reported revenue of $615.9 million in FY20, in line with the previous year, with supply chain issues resulting from COVID-19 causing delays on several large construction projects.
Despite the interruption caused by COVID-19, the company made decent progress on its markets and growth strategy, with the award of approximately $1.2 billion of new contracts and contract extensions in FY20. During the year, the company continued its work on several large resources construction projects for BHP, Rio Tinto, and Albemarle. For FY20, the company reported a NPAT of $36.5 million, down by 27.8% on FY19, mainly due to the disruption caused by COVID-19, as well as disappointing levels of profitability in the Water Infrastructure business. During the year, the company saw decent cash flow from operations and ended the year with a cash balance of $208 million, up by 27% on FY19.
FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 32.68% of the total shareholding. Pendal Group Limited and Platypus Asset Management Pty. Ltd. hold maximum interest in the company at 10.35% and 5.08%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For FY20, the company’s gross margin and net margin stood at 6.9% and 2.5%, respectively. The company’s current ratio stood at 2.02x in FY20, higher than the industry median of 1.09x, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity multiple stood at 0.24x in FY20, lower than the industry median of 0.44x.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Track Record of Paying Dividend: Over the last five years, the company has paid regular dividends to its shareholders. For FY20, the company has paid a final dividend of 13 cents per share, taking the full year dividend to 35 cents per share fully franked, representing a dividend payout ratio of ~91% of reported net profit after tax.
Dividend Trend (Source: Company Reports)
Awarded Contracts Worth $120 million: On 14 September 2020, the company announced that it has secured construction and maintenance contracts in the resources sector with a combined value of around $120 million. The company has been awarded a contract by BHP to provide structural, mechanical, and electrical upgrades at the Newman Hub site in Pilbara, Western Australia. Further, it has also been awarded a contract for dewatering the surplus water at Jimblebar mine site in Newman, Western Australia. Under the Olympic Dam Asset Projects Framework Agreement with BHP, the company has secured its first contract to provide multi-disciplinary construction services at the Olympic Dam copper mine in South Australia. Earlier on 17 August 2020, the company had announced that it has secured construction and maintenance contracts in the resources and energy sectors with a combined value of around $100 million.
COVID-19 Update: In response to COVID-19, the company has implemented safety measures at its operations to ensure business sustainability and to protect its employees and community. The company has also reduced non-essential work and delayed discretionary expenditure. Besides, the company implemented a targeted cost reduction and cash protection plan to ensure that it operates as productively and profitably as possible during such challenging times. With the gradual reopening of the economy and easing of government restrictions in Australia, the demand from customers is steadily improving, with slow recovery witnessed over recent months.
Change of Director’s Interest: Recently, the company disclosed that one of its Directors, Helen Jane Gillies, who had an indirect interest in the company had acquired 103 ordinary shares via Dividend Reinvestment Plan for a total value of $1,114.23. She now holds 8,674 ordinary shares of the company.
Outlook: MND is focused on increasing its earnings by maximising returns from its core markets, building its infrastructure business and delivering core services to overseas markets. Although the company is currently facing an uncertain global economic outlook due to COVID-19 pandemic, with solid forward workload, cost competitive service solutions, swift and decisive response to the outbreak of COVID-19, disciplined and prudent financial management practices, the company seems to be well-positioned to capitalise on opportunities and deal with challenges ahead.
In the long run, the company expects the demand for maintenance services to grow, underpinned by the aging assets and customers deferring non-essential work in prior periods. Over the coming years, the resources sector is expected to provide a steady flow of opportunities for the company. Further, the long-term outlook for renewable projects is also positive.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 10.14% and, it is currently trading towards its 52-weeks low price of $7.770, offering an opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$9.26 and a resistance of ~$11.36. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like, Boral Ltd (ASX: BLD), Fletcher Building Ltd (ASX: FBU), Incitec Pivot Ltd (ASX: IPL), etc. Considering the company’s recently awarded contracts, solid forward workload, robust balance sheet, decent long-term fundamentals, and current trading levels, we suggest a “Buy” recommendation on the stock at the closing price of $10.30, up by 1.278% on 15 October 2020.
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MND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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