Monadelphous Group Limited

MND Details

Monadelphous Group Limited (ASX: MND) is a major Australian engineering group and is engaged in providing construction, maintenance, and industrial services to the resources, energy, and infrastructure sectors.

H1FY21 Results Performance (For the Half-Year Ended 31 December 2020)

The company has recorded revenue growth of 11.2% YoY to $947.8 million whereby revenue from the Engineering and Construction division grew by 68.4% YoY to $460.3 million, while revenue from the Maintenance and Industrial Services division declined by 15.9% YoY to $491.5 million. Further, the company posted a 11.0% YoY growth in its net profit after tax to $31.6 million.

The Board of Directors declared a fully franked interim dividend of 24 cents per share.

Consolidated Income Statement (Source: Company Reports)

Bagged Contracts

The company, on 22 June 2021, updated that it has bagged several new construction and maintenance contracts in the resources sector worth around $215 million. It has won a project with BHP Olympic Dam Corporation for the smelter campaign maintenance works at the Olympic Dam copper mine in South Australia. Further, its existing maintenance services contract at Olympic Dam has been extended by two years.

Additionally, it has bagged numerous projects in the iron ore sector in the Pilbara region of Western Australia including various sustaining capital contracts as per its panel agreements with BHP and Rio Tinto. Its maintenance and construction services business, Buildtek has also won several new contracts in Chile. Moreover, the company, in association with global heavy lifting services company Fagioli, has been awarded a project with NMT International (Australia) to provide specialist heavy lifting and haulage services at the Iron Bridge Magnetite Project.

Outlook

Governments across the countries are spending billions of dollars to give a big push to their respective economies affected by the outbreak of Coronavirus and resultant closing of economies. Such moves have been helping global economies to revive. Besides, mass vaccinations have also resulted in a lower number of Corona cases being reported in most parts of the world. Thus, under improved business conditions, the infrastructure and resources sector are expected to continue delivering well. The company expects to bag a steady flow of opportunities from the resources sector going ahead. The continuing capital and operating expenditure are expected to drive strong and steady demand for engineering and maintenance services. The company, with the reputation of being the market leader in the sector, is placed in a strong position to capitalize on opportunities and deal with the challenges ahead. The company expects to witness around a 10% rise in sales revenue for FY21 on the previous year driven by healthy performance in the first half and subject to the timing of progress of projects.

Key Risks

The company has exposure to various material economic, environmental, and social sustainability risks.  Besides, it is exposed to various financial risks like interest rate risk, foreign currency risk, credit risk, and liquidity risk. Lowering demand in the oil and gas sector globally has led to delays in the development of new LNG projects.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock from its low of $7.71 temporarily retraced above the 61.8% retracement level of $14.94 and fell from there beyond the 23.6% retracement level of $10.47. For the ongoing week, it has given a close around the said level at $10.23. The technical indicator RSI with a reading around 42 suggests neutral momentum for the stock.

Going forward, the stock may have resistance around the 38.2% retracement level of $12.17 whereas support could be around the lower Bollinger band of $9.32.

Stock Recommendation

MND has delivered 6-month and 9-month returns of ~-25.4% and ~-0.38%, respectively. The stock has made a 52-week low and high of $7.770 and $15.550, respectively.

We have valued the stock using EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a premium to EV/EBITDA Multiple (NTM) (Peer Average) considering various new contract wins and extensions and its balance sheet strength with the cash balance of $169.4 million at the end of 31 December 2020. The company’s strategic alliance with Fagioli would assist its specialist heavy lift business to boost capacity and widen competence for the Australian resources and energy markets. For the purposes of relative valuation, we have taken peers like CIMIC Group Ltd (CIM.AX), Lycopodium Ltd (LYL.AX), to name a few.

Considering the aforementioned factors along with its healthy liquidity profile and decent outlook, we give a “Buy” recommendation on the stock at the current market price of $10.230 per share (Sydney, NSW, Australia Time: 4:10 pm) on 25^th June 2021.

Harvey Norman Holdings Limited 

HVN Details

Harvey Norman Holdings Ltd (ASX: HVN) operates as integrated retail, franchise, property, and digital enterprise. It has 194 franchised complexes in Australia, and 107 company-operated stores overseas. The company has a market capitalisation of ~$6.42 billion as on June 25, 2021.

Results Performance (Half-Year ended 31 December 2020 – H1FY21)

The company for the interim period reported net profit after tax and non-controlling interest at $462.03 million, up $248.44 million, representing a 116.3% increase over the same period last year. The balance sheet of the company continues to strengthen, driven by real property assets and a strong working capital position. The value of net assets during the period increased by 13.9% YoY to $3.74 billion. Harvey Norman® witnessed the net cash position of $21.75 Mn as at 31^st December 2020 as compared to the net debt position of $553.23 Mn as at 31^st December 2019.

Key Data (Source: Company Reports)

Outlook:

The solid result delivered by the company for the interim period reflects the strength and resilience of the company’s integrated retail, franchise property and digital strategy and its ability to adapt to transform to the changing landscape. The company has extended its focus on customer delight strategy, customer engagement with its brands and quality of product and services across its value chain. These fundamentals will drive the growth momentum that has been cemented in the past. Further, due to the current circumstances, it is focused on the convenience of home delivery and contactless click and collect strategy.

At 31 December 2020, the company had $499 million of unused, available financing facilities that position the company well to respond to challenges and capitalize on opportunities as and when they arise.

Key Risks:

The company is susceptible to emerging risks such as conduct risk, digital disruption, cyber-security, privacy and data breaches, sustainability and climate change.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has taken a minor correction from its high of $6.09 by closing around the 23.6% retracement level of $5.20 at $5.17 in the ongoing week. The technical indicator RSI with a reading around 49 suggests bullish momentum for the stock.

Going forward, the stock may have resistance around $5.70 whereas support could be around the 38.2% retracement level of $4.65.

Stock Recommendation:

The company’s gross margin, EBITDA margin and net margin for H1FY21 stood at 57.1%, 32.2% and 20.3%, better than the H1FY20 result of 53.7%, 23.0% and 12.0%, respectively implying a significant improvement in the company’s efficiency in managing operating and non-operating costs. ROE for H1FY21 stood at 12.9%, better than the H1FY20 result of 6.7%, implying that the company generated a better return for its shareholders.

We have applied EV/EBITDA based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). We have applied a slight discount to EV/EBITDA Multiple (NTM)  (Peer Average) considering rise in cost of sales as well as increase in inventories.

Considering the aforesaid facts, we give a “Hold” recommendation on the stock at the current market price of A$5.17 per share (Sydney, NSW, Australia Time: 4:10 pm) on June 25, 2021.

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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.

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