Company Overview: Monadelphous Group Limited (ASX: MND) is an engineering group that provides construction, maintenance and industrial services to the resources, energy, and infrastructure sectors. MND’s operations are located in Australia, China, Mongolia, Papua New Guinea, Chile, and the Philippines. The company has two operating divisions- Engineering Construction and Maintenance and Industrial Services. The company was listed on ASX on 28 March 1991.
MND Details
Key Highlights of FY21 Results: For the year ended 30 June 2021 (FY21), the company has reported improved financial results with 18.3% YoY growth in total revenue (including share of joint venture revenue) and 29% YoY growth in NPAT, reflecting increased demand for the company’s services as the industry recovered from the disruptions of COVID-19 pandemic. Major highlights from FY21 results are as follows:
- Secured New Work: During FY21, MND secured $950 million in new contracts and contract extensions across the resources, energy, and infrastructure sectors. Notably, the company secured several contracts in the 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.
- Decent Performance by Engineering Construction Division: The company’s Engineering Construction division reported revenue of $979.0 million in FY21, up 59% on FY20, reflecting the significant progress made on the company’s large portfolio of major construction contracts.
- Increase in NPAT: NPAT for FY21 stood at $47.06 million, up 29% on FY20, representing earnings per share of 49.7 cents.
- Settlement of Claim with Rio Tinto: In April 2021, the company announced a confidential out-of-court settlement with Rio Tinto in relation to the fire incident, which occurred at Rio Tinto’s iron ore processing facility at Cape Lambert, WA, in January 2019.
- Decline in Cash Balance: At the end of FY21, the company had a cash balance of $175.7 million, down from $208.3 million as at 30 June 2020.
- Improving Top Line: From 2017 to 2021, the company’s statutory revenue has increased at a CAGR of ~9%.
Five Year Financial Summary (Source: Analysis by Kalkine Group)
Track Record of Paying Dividend: For H2FY21, the company had paid a final dividend of 21 cents per share, taking the full year dividend to 45 cents per share, representing a payout ratio of approximately 90% of the reported net profit after tax. Notably, FY21 dividend is ~28.6% higher than FY20, demonstrating the company’s focus on rewarding its shareholder by paying decent dividends. At CMP of $9.81, the company’s annual dividend yield stood at 4.65%, higher than the company’s 5-year average dividend yield of 3.61%.
Dividend Trend (Source: Analysis by Kalkine Group)
Key Metrics: EBITDA margin for FY21 stood at 5.6%, in line with 5.6% in FY20. Net Margin for FY21 stood at 2.8%, up from 2.5% in FY20. Gross margin for FY21 stood at 6.4%, down from 6.9% 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 28.10% of the total shareholding, while the top four constitute the maximum holding. Pendal Group Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 7.09% and 5.21%, respectively, as also highlighted in the chart below:
(Source: Analysis by Kalkine Group)
Latest Developments:
- Change of Director’s Interest: On 1 October 2021, one of the company’s Directors, Helen Jane Gillies, who holds indirect interest in the company, acquired 197 ordinary shares for the company for a total consideration of $1,861.65 via a Dividend Reinvestment Plan.
- Zenviron Awarded Rye Park Wind Farm Contract: On 1 September 2021, MND announced that its joint venture, Zenviron Pty Ltd has received contract from Rye Park Renewable Energy Pty Ltd for delivering the Rye Park Wind Farm in regional New South Wales (NSW). It is expected that this project will be completed by Q1 FY2024 and Zenviron will perform around $250 million of works under the contract. Notably, MND has 55% ownership interest in the joint venture and 50% interest in the voting rights.
Key Risk:
- Shortage of Skilled Labour: The international and interstate border restrictions have impacted the industry’s ability to source the required levels 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: The financial performance of the company’s Maintenance and Industrial Services division can be impacted by the low level of activity in the oil and gas sector can impact.
Outlook: Looking ahead, the company expects the strong commodity prices in lithium, gold, copper, and nickel space to provide opportunities in Australia, as well as in South America, Mongolia and Papua New Guinea. The company is focused on targeting new work opportunities and assessing market opportunities to achieve ongoing service and customer market diversification and support long-term sustainable growth. In the coming months, 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.
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 9.08% and is currently trading lower than the average 52-week price level band of $8.91 - $15.55. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and has arrived at a target price of a low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the challenges associated with the shortage of skilled labour and uncertainties surrounding the COVID-19 pandemic. For the valuation purpose, peers such as CIMIC Group Ltd (ASX: CIM), Service Stream Ltd (ASX: SSM), MAAS Group Holdings Ltd (ASX: MGH) have been considered. Considering the company’s improved financial performance in FY21, track record of paying decent dividends, modest long-term outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $9.81, up by 1.447% as on 14 October 2021.
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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