MND - Monadelphous Group

[Rainman]

I didn't see your post last week. The forecast for resource investments is looking pretty grim. There are various forecasts around but some are pointing to a 2017 number that is ~30% of the 2013 peak.

https://bluenotes.anz.com/posts/2015/02/australias-major-project-spend-in-decline/

MND had revenue of $2.6B in 2013. If it's revenue was to fall in line with total resource investment spend.. revenue could be as low as $800-$1B in two or three years time. It's not unrealistic to expect MND earn <5% NPAT on $1B... which makes it <$40-50m NPAT. Compared that to the current market cap of $600m.

One can make various assumptions about margins (likely down), competitive pressure (likely up), market share (unknown, but any gain would come at the expense of margin), diversification (all players are going for it), additional revenue from maintenance etc. But you can't escape the giant elephant in the room... namely the resource capex cliff that is coming.

The future is uncertain... but conditions for MND can easily get much worse.

Thanks for the link. If ANZ's projections prove accurate, then my valuation of MND is wrong.

 

[DeepState]

But you can't escape the giant elephant in the room... namely the resource capex cliff that is coming.

...has come.

The RBA believes that Mining Capex (as % of GDP) is only presently about half way through to finding the trough for this cycle. Maxed at ~8% of GDP 2.5yrs ago. Heading to 5%. [Glenn Stevens, 18 Sept 2015]

FWIW, EPS consensus patterns against the above, suggesting that 2017 EPS will pretty much match what it had been in 2007.

 

[McLovin]

MND had revenue of $2.6B in 2013. If it's revenue was to fall in line with total resource investment spend.. revenue could be as low as $800-$1B in two or three years time. It's not unrealistic to expect MND earn <5% NPAT on $1B... which makes it <$40-50m NPAT. Compared that to the current market cap of $600m.

EBIT margins from the late 90's early noughties. Late 90's is probably the best "normal" margins, so EBIT at ~5%-5.5%.



My assumption is they will revert to somewhere around there (margins wise).

I'm not sure I really believe in the different company today than it was then story. How much of MND today is really just it being a solider of fortune in the right industry at the right time?

 

[Rainman]

EBIT margins from the late 90's early noughties. Late 90's is probably the best "normal" margins, so EBIT at ~5%-5.5%.

View attachment 64420

My assumption is they will revert to somewhere around there (margins wise).

Makes for sobering reading.

 

[skc]

EBIT margins from the late 90's early noughties. Late 90's is probably the best "normal" margins, so EBIT at ~5%-5.5%.

View attachment 64420

My assumption is they will revert to somewhere around there.

Very true... it shows that one doesn't even need heroic assumptions to come up with a scenario where the financials can get much worse.

FWIW, EPS consensus patterns against the above, suggesting that 2017 EPS will pretty much match what it had been in 2007.

I think these EPS numbers are too high. With my guesstimate $50m NPAT, the EPS is $0.54. And my guess is that, it would surprise no one if MND run into trouble with one or more of its projects during the downturn. It's facing some issue with WICET that could wipe away 2 years of profit, and quickly turn a healthy balance sheet into a shaky one.

 

[DeepState]

EBIT margins from the late 90's early noughties. Late 90's is probably the best "normal" margins, so EBIT at ~5%-5.5%.

Market is pricing about 6%.

 

[McLovin]

I think these EPS numbers are too high. With my guesstimate $50m NPAT, the EPS is $0.54. And my guess is that, it would surprise no one if MND run into trouble with one or more of its projects during the downturn. It's facing some issue with WICET that could wipe away 2 years of profit, and quickly turn a healthy balance sheet into a shaky one.

I agree. I think to get those EPS numbers you need to have a short memory on where margins could go, or you think the revenue cliff isn't so bad.

 

[McLovin]

Market is pricing about 6%.

Curious if you think that's realistic and/or where you think they're heading?

 

[Rainman]

I'm not sure I really believe in the different company today than it was then story. How much of MND today is really just it being a solider of fortune in the right industry at the right time?

But conversely how realistic is it that the mining industry and the capex that is required to sustain it will revert to more or less the level that it was at prior to the boom? I don't mean to suggest by that that I don't subscribe to the force of mean reversion. But is it possible to have 1.3 billion people coming online and all wanting a western lifestyle - modern apartments, plumbing, cars, roads, bridges and so on - and for all resource demand to revert to more or less where it was prior to China's emergence?

I was betting it was not possible and that FY 2016 marked the bottom of the cycle. But I could well be wrong.

 

[McLovin]

But conversely how realistic is it that the mining industry and the capex that is required to sustain it will revert to more or less the level that it was at prior to the boom?

It won't, but no one is suggesting that. If that was the base case then we'd be discussing MND heading <$1.

I was betting it was not possible and that FY 2016 marked the bottom of the cycle. But I could well be wrong.

IMO, if you're waiting for things to get back to where they were 3-4 years ago you're going to be waiting a very, very, very long time. The big game in town was the ramp up that peaked a few years ago, not maintenance capex once the supply response was up and running.

To be fair to MND, they're pretty honest with their industry outlook.

 

[DeepState]

Curious if you think that's realistic and/or where you think they're heading?

I do not have a detailed knowledge of this. So just reporting consensus.

Rough thoughts:

Revenue movement 2013-2017 is in line with mining capex movement per RBA. They have a big oil and gas book. I do not know the projects, but the overall idea on LNG is that the projects are coming on stream and should be moving more to maintenance mode. Offsetting this is that about a third of revenue is maintenance and not so cyclical and some of their revenue (meaningful, but not major) is infra related.

Street EBIT margin at 6% not unreasonable given super-profits and capex urgency have declined. Could be 4% could be 8%. More likely to 4%.

Consensus EPS 2017 has been doing the downward shuffle as we would expect from estimates anyway in general. I have the files, but have not read what the rationale is from the street.

This stock is not obviously expensive to me on first glance. If anything, my rough guess is that, even with a 13% pa required return (healthy premium to the market, pick a number), there is a meaningful buffer to the cheap side. This is based on consensus free cash flow of 73m in 2017 capitalized with 2.5% perpetuity growth with consensus 2015 and 2016 FCF. You can flex this and still find it hard to say it was categorically expensive.


Anyway, just first pass stuff.

 

[DeepState]

Scratch that valuation comment. It looks about fair if required return on FCF is 13% or so. Market req'd return is maybe 7-8%. So pricing a healthy premium to that, but it needs one.

All in all, I can't make a strong case to buy or sell. Looks cheapish on consensus, but allow for the usual trickle down of expectations and this moves towards fair. This is within the valuation bounds on first pass. There is a wide range of valuation possibilities and they seem to comfortably envelope the current price. Nothing for me here, at least on fundamental grounds.

 

[Rainman]

It won't, but no one is suggesting that.

Aren't you suggesting that when you write that:

EBIT margins from the late 90's early noughties. Late 90's is probably the best "normal" margins, so EBIT at ~5%-5.5%... My assumption is they will revert to somewhere around there (margins wise).

MND is not the same company that it was in the late 1990s. My understanding is that it has one of the best reputations among its competitors in this space. My bet is that that will allow it to maintain margins at or around their current levels - along with close attention paid to costs.

 

[Rainman]

There is a balanced analysis by Morningstar available here: http://analysisreport.morningstar.com/stock/research?t=MND&region=aus&culture=en-US&productCode=MLE

Morningstar has MND's operating margins averaging 7.3% during the next five years. But that estimate is clearly subject to the high degree of uncertainty that Morningstar recognizes MND faces in the coming years.

 

[McLovin]

This stock is not obviously expensive to me on first glance. If anything, my rough guess is that, even with a 13% pa required return (healthy premium to the market, pick a number), there is a meaningful buffer to the cheap side. This is based on consensus free cash flow of 73m in 2017 capitalized with 2.5% perpetuity growth with consensus 2015 and 2016 FCF. You can flex this and still find it hard to say it was categorically expensive.

Interesting thoughts Deep.

I wonder how much balance sheet liquidation is baked into that FCF forecast? As the company shrinks it will release a bit of cash that's tied up in WC.

Aren't you suggesting that when you write that:

I thnk we may be getting out lines crossed. Are we talking about margins or the level of spend? I thought it was the latter, which is what I was commenting on.

MND is not the same company that it was in the late 1990s. My understanding is that it has one of the best reputations among its competitors in this space. My bet is that that will allow it to maintain margins at or around their current levels - along with close attention paid to costs.

So are you saying it had a poor reputation back then? Otherwise what has changed?

 

[Rainman]

So are you saying it had a poor reputation back then?

There is some suggestion that MND's reputation has improved as it has grown. See post #2 on this thread. The member appears to have worked for MND in 2006.

Otherwise what has changed?

Well, it has a water and infrastructure business that it didn't have back then.

 

[Wysiwyg]

Listening to Skynews YMYC the other night and I heard MND had a potential Mongolian project that would be the largest MND has ever taken on. Googled it but found no information. They have an entity Monadelphous Mongolia LLC that is all I could find. I am positive I heard correctly. Meanwhile trend remains down to around 2009 levels.

 

[Rainman]

Listening to Skynews YMYC the other night and I heard MND had a potential Mongolian project that would be the largest MND has ever taken on. Googled it but found no information. They have an entity Monadelphous Mongolia LLC that is all I could find. I am positive I heard correctly. Meanwhile trend remains down to around 2009 levels.

Rio has the huge Oyu Tolgoi copper-gold mine in Mongolia and MND has a good commercial relationship with Rio. MND will have to announce to the market any contract win that it gets.

I think the posts by the other members on here that MND could decline much further is a fair assessment. Equally, though, one big contract win like that for the Oyu Tolgoi copper mine would mean a lot of the pessimism baked into MND's future prospects would need to be revised.

 

[Tom32]

But is it possible to have 1.3 billion people coming online and all wanting a western lifestyle - modern apartments, plumbing, cars, roads, bridges and so on - and for all resource demand to revert to more or less where it was prior to China's emergence?

I agree that it is unlikely mining activity will revert to pre boom levels, chiefley because I agree with your assumptions that too many around the world are urbanising. That said CAPEX spend easily could not only reach pre boom levels but could fall below it.

For many resources it requires capacity to reduce before costs of production are under gross revenue for the marginal producer. Who knows who is the marginal producer, though I cannot imagine all our current capacity will make the cut. While capacity is retiring CAPEX spend is unlikely. Too late for the likes of Roy Hill which will only exacerbate the issues into 2016 and beyond.

Like some of our smaller producers running at a loss and being able to sustain this through chewing through capital mining services companies can unfortunately do the same for a time. This is not a rosy picture in my view.

While capacity is being retired in mining services and construction around mines It wouldn't surprise me if making a profit becomes a thing of the past for a time. The other unfortunate thing is unlike a high grade ore deposit for a solid miner allowing them safe passage through a supply glut, mining services are a pretty level playing field where one is not exceedingly better / cheaper than the next.

The picture for their more diversified construction business is unfortunately pretty tough from where I'm sitting as well, in all but perhaps NSW. Overseas may offer up better margins but there is a reason some parts of the world offer construction outfits better margins, with payment risk being higher than in Aus, South Africa and Europe.

 

[Wysiwyg]

Rio has the huge Oyu Tolgoi copper-gold mine in Mongolia and MND has a good commercial relationship with Rio. MND will have to announce to the market any contract win that it gets.

Thanks. Just had a read about that mine and 95% of the workforce are Mongolian and the mine has been running for a few years now so I suppose maintenance/operation contracts are established. My hopes are dashed on anything significant coming out of there for MND because it would have happened in the earlier years. Bit of false hope by the commentator I heard it from.