Monadelphous Group (MND) is a leading engineering group providing extensive engineering construction, maintenance and industrial services to the mining, energy and infrastructure sectors.
The group comprises of the following three business groups:
>> Engineering Construction, which includes Electrical and Instrumentation Services
>> Maintenance and Industrial Services
>> Infrastructure, which includes Aviation Support Services
1H13 results
MND’s positive first half results have been largely overshadowed by a severe slowdown in tendering activity among the major contractors.
The group’s 1H13 revenue was up 46.6% on-year to $1.3 billion, coming on the back of a surge in construction activity.
However, EBITDA margin declined 60 basis points from 1H12 as the bidding war between mining services companies lowered contract tender rates (similar to how retailers reduce prices to win sales).
Worsening industry conditions have seen Boart Longyear (BLY), Transfield Services (TSE) and UGL Ltd (UGL) all issue profit warnings in recent weeks.
In addition to revenue, the sharp decline in industry activity is likely to pressure MND’s operating cash flow (OCF).
MND’s OCF slid 37% from the prior corresponding half, and we expect another decline in the current half as weaker revenue squeezes the company’s cash intake.
Chinese growth concerns dims outlook
Unfortunately, we see MND coming under increased pressures in near term as industry activity slows in the face of a weakening Chinese economy.
Chinese GDP rose just 7.7% in the year to March – weaker than economist estimates.
Furthermore, the Chinese manufacturing sector entered contraction territory in May for the first time in seven months, according to the HSBC Flash Manufacturing PMI.
There appears to be an emerging consensus that the resources boom has peaked, putting mining services contractor in an uncomfortable situation where they face lower profit margins.
We expect MND’s own margins to come under further pressure as revenue growth slows and cost-cutting initiatives take time to play out. We don’t think it can repeat 1H13’s solid result, with revenue likely to suffer amid reduced tendering activity.
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