Company Overview: Monadelphous Group Limited (ASX: MND) is a leading Australian engineering group that provides services maintenance and industrial services to some of the largest companies in the resources, energy, and infrastructure sectors. The company has two operating divisions - Engineering Construction and Maintenance and Industrial Services. Under its Engineering Construction division, MND provides large scale, multidisciplinary project management and construction services. Under its Maintenance and Industrial Services division, it provides comprehensive, multidisciplinary maintenance and improvement solutions customers across Australasia.
MND Details
Engineering Construction Division Driving Revenue Growth: Monadelphous Group Limited (ASX: MND) is Australia’s leading engineering group that provides construction, maintenance, and industrial services to the resources, energy and infrastructure sectors. As on 20 May 2021, the company’s market capitalisation stood at ~$934.34 million. Despite the challenges created by the COVID-19 pandemic, MND secured approximately $360 million of new contracts and contract extensions during the first half of FY21. During H1FY21, MND’s Engineering Construction division progressed strongly on various resource construction projects and reported 68% YoY growth in revenue. Due to the reduced levels of demand within the oil and gas sector and lower maintenance activity levels, MND’s Maintenance and Industrial Services division witnessed 15.9% decline in its revenue during H1FY21. Over the last five years (2016- 2020), the company’s revenue has increased at a CAGR of 2.12%.
Over the coming years, MND expects the resources sector to provide a steady flow of opportunities. Further, the ongoing capital and operating expenditure in the resource sector are expected to drive steady demand for engineering construction and maintenance services. Currently, MND 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. With its reputation as a leader in its markets, and its longstanding commitment to the delivery of safe, reliable, and cost-competitive service solutions, MND seems well-positioned to capitalise on opportunities and deal with the challenges ahead.
Past 5-year Financial Performance (Source: Refinitiv, Thomson Reuters and Company Reports)
Decent Revenue Growth in H1FY21: For H1FY21, MND reported total revenue of $947.8 million, up 19% on H2FY20 and 11% on H1FY21, mainly driven by the revenue growth in Engineering and Construction division. EBITDA for H1FY21 stood at $57 million, down by 3.5% on pcp. In 1HFY21, 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 2020, the company had cash of $169.4 million, up 3.7% on pcp.
H1FY21 Results Highlights (Source: Company Reports)
FY20 Result Highlights: For the year ended 30 June 2020, MND reported total revenue from contracts (including revenue of joint ventures) of $1,650.8 million, up 2.6% on FY19, driven by the decent demand for maintenance, shutdown and sustaining capital services within the resources sector, and the commencement of a number of large resource construction projects. Statutory revenue for FY20 stood at $1,487.39 million. During FY20, MND was awarded $1.2 billion of new contracts and contract extensions. Over the year, the company broadened its service offerings 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. 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 for H1FY21 stood at 7.3%, up from 5.0% in H2FY20. EBITDA margin for H1FY21 stood at 5.3%, up from 3.7% in H2FY20. ROE for H1FY21 stood at 8%, up from 2.0% in H2FY20. Current ratio for H1FY21 stood at 1.84x, higher than the industry median of 1.10x.
ROE & Profitability Metrics; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Top 10 Shareholders: The top 10 shareholders together form around 28.55% 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 paid an interim dividend of 24 cents per share, up 9.1% on pcp. The dividend was paid on 26 March 2021. The annual dividend yield of the company is about 4.36% on a five-year average basis (FY16-20), and, thus, it looks like that Monadelphous Group Limited has been generating decent income for its shareholders, which might attract the attention of dividend seeking investors.
Dividend Trend (Source: Company Reports)
Long-Term Crane Services Contract with Fortescue Metals Group Ltd: On 18 March 2021, the company announced that it had secured a new five-year crane services contract with Fortescue Metals Group Ltd to provide crane services to Fortescue’s Solomon and Eliwana operations in the Pilbara region of Western Australia. The contract is valued at approximately $150 million in total.
Settlement of claim with Rio Tinto: In August 2020, Rio Tinto had filed a Writ of Summons against one of MND’s wholly owned subsidiaries in respect of a fire incident, which occurred at Rio Tinto's iron ore processing facility at Cape Lambert in January 2019. On 16 April 2021, MND announced that it had reached a confidential out-of-court settlement with Rio Tinto. The settlement will be covered by the proceeds of the insurance.
Key Risks: The company is exposed to the risks associated with the declining global demand in oil and gas sector. MND is exposed to the risk associated with labour capacity constraints. The company is also exposed to the risks related to the fluctuations in Iron ore prices, which might influence revenue realization.
Outlook: Looking ahead, the company expects the resources sector to provide a steady flow of construction and maintenance opportunities. The long-term outlook for the renewable sector is also positive. In FY21, the company expects its revenue to grow by around 10% on FY20.
Currently, MND 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. With a healthy balance sheet comprising a cash balance of $169.4 million (as at 31 December 2020), the company seems well funded to invest in suitable opportunities when they arise in the future.
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 12.72% and is trading lower than the average 52-week price level band of $15.55 and $7.770, offering a decent opportunity for accumulation. 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 expected growth in the demand for engineering construction and maintenance services, and positive resource sector outlook. We have taken peers like CIMIC Group Ltd (ASX: CIM), Service Stream Ltd (ASX: SSM), and MAAS Group Holdings Ltd (ASX: MGH). Considering the recently secured five-year crane services contract with Fortescue Metals Group Ltd, decent performance in H1FY21, expected growth in FY21 revenue, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation to the stock at the market price of $10.05, up by 1.926% as on 20 May 2021.
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MND Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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