1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Industrials||52-Week Range: A$13.46 – 19.81|
|Industry: Engineering Services||Market Cap: A$1.337.3m|
We rate MND as a Neutral for the following reasons:
- Decent pipeline of contracts secured with major clients in resources and energy sectors.
- Strong commodities price increases in the last 6 months expected to continue in oil and gas and moderate in iron ore.
- Diversifying services (via new categories such as renewables and infrastructure), and by geography (international) to support margins.
- Net cash position and solid balance sheet. Strong balance sheet will support investment in new business opportunities especially in infrastructure.
- Strong cash generation.
We see the following key risks to our investment thesis:
- Further deterioration in global macro-economic conditions.
- Project cancellations.
- Deterioration in commodity prices especially oil and gas and iron ore.
- Integration issues with acquisitions resulting in added costs offsetting any synergies.
Figure 1: MND revenue by segment
Figure 2: Engineering Construction revenue by customers split
Figure 3: Maintenance & Industrial revenue by customers split
Monadelphous Group Ltd (MND) posted lackluster results which missed the majority of analysts’ estimates on all fronts, even though the company saw a +41.1% increase (over the previous corresponding period, pcp) in revenue to $1.78bn, predominantly driven by growth from infrastructure markets and strengthening demand for maintenance services across both the resources and energy sectors.
Over the year, MND made solid progress in their infrastructure business (increasing activity levels in the renewable energy and water and irrigation markets) and overseas markets (such as via acquisition of and securing contracts with Newcastle-based maintenance and irrigation service businesses, and award of packages of work on the Oyu Tolgoi Underground Project in Mongolia). MND secured new contracts and additional work valued at ~$600m since the beginning of the financial year.
Management expects maintenance activity to remain positive, bolstered by a
1. production ramp up on newly commissioned LNG projects;
2. increasing required levels of maintenance and support on aging resources;
3. increases in capital projects announced or under feasibility studies; and
4. stabilizing commodity prices. MND trades largely in-line with our valuation and multiples of 17.5x PE20, 3.9% yield – Neutral.
- FY18 Key results – highlights: Over the pcp:
1. Group revenue up +41% to $1.78bn.
2. EBITDA up +21.2% to $119.0m.
3. EBITDA margin down -1.09pp to 6.67%.
4. NPAT up +25% to $71.5m.
5. EPS up +24% to 76.1cps.
6. Full year dividend at 62cps (up +14.8%), fully franked (div payout ratio 82%).
7. Strong balance sheet with cash balance $208.8m, cash flow from operations of $51.6m and cash flow conversion ratio of 69.4% (down 61.4pp).
- Divisional highlights: Over the pcp:
1. Engineering Construction (53% of EBITDA) reported sales revenue up +54.4% $949.9m, driven primarily by an increase in oil and gas construction activity and growth in water and renewables. MND’s heavy lift services business also expanded fleet and opened a new facility.
2. Maintenance and Industrial Services (47% of EBITDA) reported record sales revenue of $841.1m (up +28.9%) due to increased levels of demand for services in both resources and energy. The division also benefited from broadened services and geographic diversification.
- Outlook signals recovery and growth. While management did not provide quantitative guidance, they reiterated the improvement in the long-term outlook for resources and energy, especially potential improvement in its project pipeline visibility with several major iron ore projects having entered early stages of development. However, the company is forecasting lower construction revenues in 2018/19 due to the significant revenue contribution earning from the Ichthys project in the pcp. Nonetheless, the company is currently experiencing “high levels of tendering activity, with planned major resources construction projects expected to generate significant revenue opportunities in 2019/20 and beyond”. MND continues to focus on productivity improvements as “competition levels in the industry remain high and customers remain focussed on cost competitive solutions”.
MND FY18 RESULTS
Figure 4: MND Results Summary
Figure 5: MND Financial Summary
Source: BTIG, Company, Bloomberg
Monadelphous Group Ltd (MND) comprises of two divisions
1. Engineering and Construction; and
2. Maintenance and Industrial Services. MND is predominately engaged in mining and process industry maintenance, mining equipment refurbishment, process plant maintenance, project management and construction, labor and plant equipment hire predominately to the resources, energy and infrastructure sectors.