Monadelphous Limited

MND Details

Change in Directors’ Interest: Monadelphous Limited (ASX: MND) is an engineering group providing construction, maintenance, and industrial services to the resources, energy, and infrastructure sectors. MND has a global presence with projects in New Zealand, China, Chile, Papa New Guinea, the Philippines, etc. Director, Susan Lee Murphy, acquired and held 8,000 ordinary shares in MND via an on-market transaction on 15 September 2021. 

Zenviron Received Rye Park Wind Farm Contract:

• Zenviron Pty Limited recently secured a contract with Rye Park Renewable Energy Pty Limited to deliver the wind farm project in regional New South Wales.
• MND is a 55% shareholder in the incorporated joint venture (Zenviron). Zenviron will undertake ~$250 million of work as per the contract.

FY21 Financial Results:

• Revenue Growth: MND reported an increase of 18.3% in total revenue on pcp to $1.95 billion in FY21 due to increased services, recovery from the initial phases of COVID-19 impact, and customers demand to capitalise on increasing prices of the iron ore.
• Increase in NPAT: The NPAT rose to $47.1 million, up by 29% YoY during the year.
• Final Dividend Declared: The Board has declared a final dividend of 21 cents per share (cps), totalling FY21 dividend to 45 cents per share fully franked. DRP (Dividend Reinvestment Plan) will be applicable on the final dividend.
• Liquidity & Debt Position: MND held $175.7 million cash and cash equivalents and $97.58 million of total debt as of 30 June 2021.

Operating Revenue & NPAT from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: MND faces a shortage of skilled resources due to COVID-19, restrictive inter-state and overseas labour movement, and high industry activity levels. Forex headwinds pose a risk due to the company's global operations. 

Outlook:

• MND expects favourable economic conditions and robust commodity prices (gold, copper, nickel, and lithium) to facilitate a robust pipeline of opportunities in Australia, South America, Papua New Guinea, and Mongolia.
• The company has obtained $950 million of new agreements and extensions for the energy, resources, and infrastructure markets from the beginning of FY21. MND secured ~$200 million work after the year-end.
• A large component of the new work obtained is in the iron ore sector and multiple capital work projects have been secured under panel agreements with Rio Tinto and BHP.

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: The stock of MND gave a negative return of 13.53% in the past six months and a negative return of 34.03% in the past nine months. The stock is currently trading lower than the 52-weeks’ average price level band of $8.920 - 15.550The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median, considering its lower net operating cash inflows and cash balance in FY21 vs FY20, and continued challenges of skilled labour availability and mobility due to COVID-19. For the purpose of valuation, few peers like CIMIC Group Limited (ASX: CIM), Service Stream Limited (ASX: SSM), Lycopodium Limited (ASX: LYL), and others have been considered.  Considering the current trading levels, decent financial results of FY21, newly secured orders and extensions in FY21, decent outlook, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $9.00, as on 22 September 2021, 10:30 AM, (GMT+10), Sydney, Eastern Australia.

MND Daily Technical Chart, Data Source: REFINITIV

Service Stream Limited

SSM Details

Change in Substantial Holding: Service Stream Limited (ASX: SSM) offers essential network services to utility operators and fixed line- and wireless telecommunications firms in Australia. On 17 September 2021, Allan Gray Australia Pty Limited and its related entities became substantial shareholders with 5.09% voting rights in SSM.

Key Takeaways from FY21:

• Decline in Revenue: The revenue for FY21 stood at $804.20 million, down by 13.4% on the previous year, due to lower revenue from its Telcom segment. The decline in Telecom growth was due to lower activation volumes as per the nbn construction operations in FY20.
• Decline in NPAT: SSM recorded an NPAT of $29.27 million, registering a decline of 40.6% YoY.
• Net Operating Cash Flows: The cash flow from operations stood at $45.5 million in FY21 versus $57.7 million in FY20.
• Liquidity Position: SSM exited FY21 with $50.57 million cash and cash equivalents as of 30 June 2021.
• No FY21 Dividend: The Board has decided not to declare final dividend for FY21 to support financing of the Lendlease Services Acquisition.

Update on Lendlease Services Acquisition: The company has inked a binding agreement with Lendlease Group to acquire 100% of Lendlease Services Business for ~$295 million post debt-consideration. The deal is estimated to be completed around November 2021.

Total Revenue & NPAT Trend from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces delays in mobilisation programs, increased costs on protective equipment, additional cleaning, and separate warehouse shifts on account of the COVID-19 impact.

Outlook:

• SSM has secured multi-year agreements (Unify Networks, Unify Services, etc.) for its Telecommunications segment to boost the opportunities pipeline.
• In the Utilities segment, SSM has experienced positive momentum in FY21 and expects robust new work activity with pipeline of new water and gas utility projects due to urban expansion and infrastructure upgrade.
• The network services’ demand outlook will remain strong in the medium term.
• The combined Group entity post the acquisition will generate revenue of ~1.6 billion (Pro-Forma (PF), ~$142 million of PF EBITDA, and cost synergies of ~$17 million per year and further.
• SSM expects to resume dividends in FY22, subject to its financial performance.

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: SSM believes the Lendlease Services’ acquisition will help diversify Group revenues, improve capabilities, and grow its addressable markets. The stock of SSM gave a negative return of 6.73% in the past three months and a negative return of 33.82% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.735 - $2.431. The stock has been valued using an Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median, considering its decline in revenue and NPAT in FY21 vs FY20, and the continued impact of COVID-19. For the purpose of valuation, few peers like CIMIC Group Limited (ASX: CIM), Lycopodium Limited (ASX: LYL), Johns Lyng Group Limited (ASX: JLG), and others have been considered. Considering the low trading levels, secured contracts for Telecom for FY22, expected Comdain (Utility segment) revenue growth from new contract wins, ongoing acquisition deal & expected synergies, revised earnings profile post acquisition in CY21, valuation, and associated business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.780 as on 22 September 2021, 11:42 AM, (GMT+10), Sydney, Eastern Australia.  

SSM 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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