Overview: Monadelphous Group Limited (“MND”, “the Company”) is an Australian engineering services company. It is engaged in providing construction, maintenance, and industrial services to the mining, energy, and infrastructure sectors throughout Australia. MND has two divisions: Engineering Construction and Maintenance and Industrial Services.
Hurdles: MND’s revenue has declined for the past two consecutive years and its long-term performance is dependent on increasing levels of investment in the mining and energy sector. A further slowdown in global economic conditions with adverse impact on coal, iron ore, and LNG demand, would aggravate the risks of fewer new order flows or deferral of existing contracts.
Catalysts: MND is well placed to benefit from a recovery in the depressed mining services sector. Backed by its diversification into the marine infrastructure sector and cost restructuring measures, MND’s results are projected to be less impacted by the cyclical downturn. Most key commodity prices have recovered year-to-date which should enable management to reward shareholders via attractive dividends. The FY16 dividend distribution is estimated to yield ~$7%.
Investment View: MND is strategically placed to leverage from any recovery in mining investments. We are attracted to its long-term earnings growth record, free cash flow profile, and management’s interest in driving shareholders’ return. Whilst the near-term outlook for the metal and mining sector looks challenging, MND is well placed to benefit from any cyclical recovery. The stock is trading at an undemanding valuation and we estimate a dividend yield of ~7% and with a resilient business model of the diversified revenue base, we initiate coverage with a ‘buy’ rating.
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