Company Overview: Monadelphous Group Limited (ASX: MND) is a leading Australian engineering group that provides construction, maintenance, and industrial services to the resources, energy and infrastructure sectors. Under its Engineering Construction division, MND provides large-scale, multidisciplinary project management and construction services. The company has offices, projects, facilities and workshops across several countries, including Australia, New Zealand, China, Mongolia, Papua New Guinea, Chile, and the Philippines.

MND Details

Key Takeaways from FY21 Financial Results: During FY21, the company made significant progress on its large portfolio of major construction contracts, and it witnessed strong demand for maintenance services within the iron ore sector.

• Rise in Revenue: For FY21, MND reported total statutory revenue of $1.75 billion, up ~17.8% on FY20, driven by ~59% YoY growth in the revenue from Engineering Construction division. Revenue, including MND’s share of joint venture, stood at $1.95 billion, up ~18% on the previous year.
• Rise in EBITDA: EBITDA for FY21 stood at $108.7 million, up ~18% on the previous year, reflecting the increased demand for the Company’s services as the industry recovered from the impacts of COVID-19 pandemic.
• Major Contract Awarded in Iron Ore Sector: During FY21, MND secured several contracts in iron ore sector, including a significant number of sustaining capital work projects with both BHP and Rio Tinto, and five-year crane services contract with Fortescue Metals Group.
• Decline in Cash Balance: As at 30 June 2021, the company had cash balance of $175.7 million, down from $208.3 million as at 30 June 2020.

Five Year Financial Summary (Source: Analysis by Kalkine Group)

Track Record of Paying Dividend: MND has a track record of paying decent dividends to its shareholders. For H2FY21, the company had declared a final dividend of 21 cents per share, taking the full year dividend to 45 cents per share, which is ~28.6% higher than the dividend paid in FY20. The total dividend represents a payout ratio of approximately 90% of the reported net profit after tax. The final dividend has a record date of 10 September 2021 and payment date of 1 October 2021. At CMP of $10.57, the company’s annual dividend yield stood at ~4.24%, higher than the company’s 5-year average dividend yield of 3.61%, demonstrating the company’s focus on providing decent dividends to its shareholders.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: For FY21, the company’s gross margin stood at ~6.4%, slightly down from 6.9% in FY20. Net Margin for FY21 stood at 2.8%, up from 2.5% in FY20. Current ratio for FY21 stood at 1.92x in FY21, down from 2.02x in FY20.  Cash cycle for FY21 stood at 49.1 days, down from 55.5 Days in FY20.

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 28.11% 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 7.11% and 5.22%, respectively, as also highlighted in the chart below:

                    

(Source: Analysis by Kalkine Group)

Zenviron Awarded Rye Park Wind Farm Contract: Zenviron Pty Ltd, an incorporated joint venture in which MND is a 55% shareholder, was recently awarded a contract with Rye Park Renewable Energy Pty Ltd for the delivery of the Rye Park Wind Farm in regional New South Wales (NSW). It is expected that under the contract Zenviron will perform approximately $250 million of work.

Key Risks:

• Shortage of Skilled Labour: The prolonged effects of COVID-19 international border restrictions are causing a shortage of skilled labour. The shortage of labour could impact the productivity of the company’s operations.
• Lower Level of Activity in Oil and Gas sector: Low level of activity in the oil and gas sector can impact the financial performance of the company’s Maintenance and Industrial Services division.

Outlook: In the coming years, the company expects the resources, energy and infrastructure sectors to provide it a strong pipeline of opportunities. The strong commodity prices in lithium, gold, copper and nickel space are expected to provide opportunities in Australia, South America, Mongolia and Papua New Guinea.

In the upcoming period, the company expects to complete several large construction projects. However, due to the timing of award and commencement of new major projects, MND’s revenue in FY22 is expected to be lower than the previous year. Moving forward, the company will continue to assess market opportunities to achieve ongoing service and customer market diversification while achieving long-term sustainable growth.

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

Source: 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 six months, the stock has corrected by ~4.60% and is currently trading lower than the average 52-week price level band of $9.110 - $15.550. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). The company can trade at slight discount to its peers, considering the uncertainty surrounding the impact of COVID-19 pandemic, and expected challenges from the shortage of skilled labours. For the valuation purpose, peers such as CIMIC Group Ltd (ASX: CIM), NRW Holdings Ltd (ASX: NRW), Johns Lyng Group Ltd (ASX: JLG), have been considered. Considering the company’s improved top and bottom line in FY21, decent demand for maintenance services within the iron ore sector, decent long-term outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $10.57, as on 2 September 2021 , 12:10 PM (GMT+10), Sydney, Eastern Australia).

MND Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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. 

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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