Monadelphous Group Limited

MND Details

Addition of New Contract: Monadelphous Group Limited (ASX: MND) is in the provisioning of engineering services within Australia. Recently, director Robert Velletri has made a change to holdings in the company via acquiring 300,000 options on 23 November 2021. As announced on 17 November 2021, the company has won new contracts and contract extensions of around $110 million in the resources sector.

FY21 Financial Summary:

• Growing Revenue: As a result of increased demand for its services as the industry recovered from the delays and disruptions faced during the initial phases of COVID-19, the company recorded an increase of 18.3% in revenue to $1.95 billion.
• Rise in NPAT: MND posted a net profit after tax of $47.1 million, reflecting a growth of 29% over pcp. NPAT indicated earnings per share of 49.7 cents against 38.7 cents in FY20.
• Dividend Payment: The company declared a fully franked final dividend of 21 cps, which took the full-year dividend to 45 cps.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Contracts Pricing Risk: The company’s business is exposed to risk arising from the change in pricing of contracts, which could impact its financial health.
• Skilled Labour Shortage: The international border restriction caused by COVID-19 has created a shortfall in skilled labour, which is likely to remain a key challenge and could impact its operations.

Outlook:

• Looking forward, the company is optimistic that buoyant resources, energy, and infrastructure sectors are expected to provide a solid pipeline of opportunities.
• MND would continue to evaluate market opportunities to attain ongoing service and customer market diversification and support long-term sustainable growth.
• Due to the timing of new major projects, the company expects revenue for FY22 to be lower. However, it anticipates stronger construction activity in FY23.

Valuation Methodology: P/E 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 is trading below its 52-weeks’ low-high average of $8.910 - $15.550, respectively. The stock has been corrected by ~7.89% and ~11.15% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average P/E multiple, considering the expected growth in construction activity and winning of significant contracts. For the purpose of valuation, peers such as Downer EDI Ltd (ASX: DOW), Fletcher Building Ltd (ASX: FBU), and Boral Ltd (ASX: BLD) have been considered. Considering the expected upside in valuation, decent outlook, rising revenue and NPAT, decent liquidity position, high return on Equity, and current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of $9.150, down by ~2.244% as on 03 December 2021,

MND Daily Technical Chart, Data Source: REFINITIV 

Service Stream Limited

SSM Details

Increased Shareholding: Service Stream Limited (ASX: SSM) provides end-to-end asset life-cycle services to utility and telecommunications asset operators, owners, and regulators. On 30 November 2021, Allan Gray Australia Pty Ltd increased his shareholding from ~6.72% to ~7.90% in SSM.

Chair Address and Lendlease Acquisition:

• On 1 November 2021, SSM expanded the business with the addition of Lendlease Services business to its portfolio and will now diversify revenue catering to transportation, industrial and powerline operation, and maintenance activities. It will also further strengthen its telecom and utilities capabilities.
• The company witnesses strong demand for its services in FY21 and has a healthy contracted pipeline of work across its telecom client base.
• The Utilities segment led by Comdain Infrastructure witnessed an 7.1% YoY increase in revenue in and the Telecom Division renewed all its major contracts in FY21.

Key Financials’ Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of COVID-19 disruptions, acquisition synergies, and revue diversification.

Outlook:

• The combined entity estimates ~$1.7 billion proforma revenue and ~$120-125 million proforma EBITDA, inclusive of the proforma run rate of synergies. The FY22 consolidated results will comprise Lendlease’s earnings from 1 November 2021 to 30 June 2022.
• SSM has contracted work in hand worth over ~$2.0 billion (excluding extension options) in the future.

Valuation Methodology: Price/ Earnings 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 SSM gave a negative return of ~2.94% in the past three months and a negative return of ~10.36% 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 the P/E multiple- based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average P/E multiple, considering its lower revenue, NPAT, the impact of COVID-19 on the telecom business in FY21, expected draw down of debt facilities due to the acquisition, and risk of realisation of synergies. For this purpose of valuation, few peers likeGenusPlus Group (ASX: GNP), CIMIC Group Limited (ASX: CIM), Monadelphous Group Limited (ASX: MND), and others have been considered. Considering the current trading levels, growth of Comdain business in FY21, contracted work in hand for future, expanded earnings base with the combined entity and customers’ addition, valuation upside, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.823, as of 3 December 2021, 10:45 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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