Company Overview: Monadelphous Group Limited (ASX: MND) is a leading engineering group in Australia that provides large-scale multi-disciplinary project management and construction services. Headquartered in Perth, Western Australia, MND operates offices in Brisbane and Queensland. The company 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.

MND Details

Uniquely Placed with Cost-Competitive Service Solutions: Monadelphous Group Limited (ASX: MND) is Australia’s leading engineering group providing construction, maintenance and industrial services to the resources, energy and infrastructure sectors. The company has two operating divisions - Engineering Construction, and Maintenance and Industrial Services. The company is known for providing cost competitive service solutions in the markets. Despite the challenges brought by COVID-19 pandemic, MND was able to report decent overall performance in FY20, with Maintenance and Industrial Services division reporting a 5.1% YoY growth in revenue, mainly due to the decent demand for maintenance, shutdown and sustaining capital services within the resources sector. Over the last five years (2016- 2020), the company has maintained a track record of paying decent dividends to its shareholders and its revenue over the period has increased at a CAGR of 2.12%.

Looking ahead, the company is focused on expanding its service offering and strengthening its rail, coal seam gas pipeline. It also plans to invest in specialist equipment to enable further growth and support the delivery of its existing contracts. Over the coming years, the company expects the resources sector to provide a steady flow of opportunities. Moreover, it expects the demand for engineering construction and maintenance services to rise further. With a healthy balance sheet comprising cash balance of $169.4 million (as at 31 December 2020), the company seems well funded to invest in suitable opportunities as they arise.

Past 5-year Financial Performance (Source: Refinitiv, Thomson Reuters and Company Reports)

Decent Revenue Growth in H1FY21:  During the half-year ended 31 December 2020, the company secured $360 million of new contracts and earned a total revenue $947.8 million which was 11.2% higher than the previous corresponding period (pcp). Over the period, the company progressed work on its resource construction projects and steadily regained momentum in maintenance activity levels. From the Engineering Construction division, the company reported total revenue of $460.3 million, up 68.4% on pcp. Revenue from Maintenance and Industrial Services stood at $491.5 million, down by 16% on pcp, impacted by the COVID-19 pandemic and reduced levels of demand within the oil and gas sector. Net profit after tax stood at $31.6 million in H1FY21, up 11% on pcp. As at 31 December 2021, the company had cash of $169.4 million.

Revenue Summary (Source: Company Reports)

FY20 Result Highlights: During the year ended 30 June 2020, 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 broadened its service offering through a number of strategic acquisitions totalling $14.3 million, including iPipe Services, a specialist provider of pipeline solutions to the coal seam gas sector, Buildtek, a Chile-based maintenance and construction services contractor and Harbinger Infrastructure, a rail infrastructure maintenance service provider. For the year, the company reported statutory revenue of ~$1.49 billion and EBITDA of ~$92.1 million. Net profit after tax for the period stood at ~$36.5 million, with basic earnings per share of ~38.7 cents. Cash flow from operations was $119.1 million in FY20, resulting in a cash flow conversion rate of 151%.

Net Profit and EPS Trend (Source: Company Reports)

Key Metrics: Gross margin and EBITDA margin for FY20 stood at 6.9% and 5.5%, respectively. ROE for FY20 stood at 9.5%. Current ratio for FY20 stood at 2.02x, in line with FY19. Debt-to-Equity ratio for FY20 stood at 0.24x, lower than the industry median of 0.56x.

Past 5-year Financial Performance for Year Ending 30 June; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 28.48% of the total shareholding, while the top four constitutes the maximum holding. Pendal Group Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 8.15% and 5.23%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Track Record of Paying Dividend: MND has a decent track record of paying regular dividend to its shareholders. For FY20, the company paid total full year dividend of 35 cents per share fully franked, representing a dividend payout ratio of ~91% of reported net profit after tax. For H1FY21, the company has declared an interim dividend of 24 cents per share, up 9.1% on pcp. The dividend is payable on 26 March 2021. At CMP of $10.680, the company’s annual dividend yield stood at 3.46%.

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 the Pilbara, Western Australia. Further, it has also been awarded a contract for dewatering the surplus water at Jimblebar mine site in Newman, Western Australia.

Key Risks: The company is exposed to the risks associated with the declining global demand in oil and gas sector. Further, the company is also exposed to the risk associated with labour capacity constraints.

Outlook: In order to enhance its competitive position in the market and deliver high-quality services, MND continues to develop and implement improved operational and support methodologies, practices and processes. Currently, it is focused on digitisation of its in-field data capture processes, and automation of data processing activities, so that it can easily identify and focus on the areas of greatest opportunity for cost reduction and efficiency in operational and administrative performance.

Looking ahead, the company expects the resources sector to provide a steady flow of opportunities over the coming years. In FY21, the company expects its revenue to grow by around 10% on FY20. With its longstanding commitment to the delivery of safe, reliable and cost competitive service solutions, the Company is well positioned to deal with any uncertainty as well as to capitalise on the on the upcoming opportunities.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 30.65% and is trading lower than the average 52-week price level band of $15.55 and $7.770, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$9.2 and resistance of ~$14.552. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average EV/EBITDA (NTM trading multiple), considering the modest outlook, and expected growth in the demand for engineering construction and maintenance services. Considering the company’s decent performance in H1FY21, expected growth in FY21 revenue, modest outlook, current trading level and valuation, we give a “Buy” recommendation to the stock at the closing price of $10.680, down by 0.094% as on 11 March 2021.

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

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