MND - Monadelphous Group

[galumay]

There are still stocks that are going up in the present market, or at the very least, not showing the determined and pronounced downtrend of MND. It has been trading below the EMA since July.

I'm just curious, and certainly there's no obligation for you or anyone else to respond, but is there a point at which the losses will be unacceptable, or is it a case of "too late now to sell"? Or "I believe in this stock, am emotionally invested in it, so will find any point that will allow me to rationalise holding."

For me Julia there is no reason to sell, to respond in order to your points, a loss is not made until I sell, and in general a loss is unacceptable full stop. The point at which I would sell would be if the fundamental reasons I bought changed to the extent that i could no longer justify holding. Its never "too late now to sell", its very often too soon to sell in my view. If you sell everytime the market, or a share drops you will realise a lot of losses! Finally I am not emotionally invested, I am rationally invested. The fundamentals of MND are compelling IMO, I do take a contrarian view of the extent and length of the impact of the mining industry coming to the end of a boom cycle and I am also more than happy to hold thru cyclic markets like the resources sector.

I suspect that you are more asking from a trading point of view than an investing one, but I thought I would share my thoughts regardless.

 

[clinta44]

I for one wouldn't mind seeing them announce a buy back, the price seems sensible at the moment, they are sitting on a bunch of cash and I personally prefer buy backs and organic growth over growth by acquisition.
AGMs is today 10am WST will be interesting to see if the board makes any outlook statements for the half and FY...

 

[skc]

I for one wouldn't mind seeing them announce a buy back, the price seems sensible at the moment, they are sitting on a bunch of cash and I personally prefer buy backs and organic growth over growth by acquisition.

AGMs is today 10am WST will be interesting to see if the board makes any outlook statements for the half and FY...

AGM update not as bad as some feared. They've mentioned revenue reduction of ~15-20% on H1 while H2 is dependent on contract award. So H1 revenue ~$1B while H2 say 20% lower put full year revenue @ $1.8B.

NPAT margin was ~5.9% and one'd expect that to fall on lower revenue... so say 5% @ $1.8B = $90m NPAT. With net cash of $180m at year end, it's trading at PE ~9x... So to me it's not a bargain yet given industry conditions.

 

[galumay]

So to me it's not a bargain yet given industry conditions.

You certainly need a contrarian view of the sector to see them as a bargain! I have that view, but I know its not commonly shared. What is hard to dispute is that of the mining services companies, MND are in one of the strongest positions, a good balance sheet, low debt, and reasonable prospects given the downturn in the sector overall.

Even allowing for a continuing decrease in dividends in line with lower earnings thru this part of the cycle, they will return very healthy yields and the prospect of price growth as the sector improves over time if you pick them up at current prices.

 

[McLovin]

You certainly need a contrarian view of the sector to see them as a bargain! I have that view, but I know its not commonly shared. What is hard to dispute is that of the mining services companies, MND are in one of the strongest positions, a good balance sheet, low debt, and reasonable prospects given the downturn in the sector overall.

Even allowing for a continuing decrease in dividends in line with lower earnings thru this part of the cycle, they will return very healthy yields and the prospect of price growth as the sector improves over time if you pick them up at current prices.

I'd be curious where you think the bottom of the cycle is, galumay? To me it doesn't seem like you have to make wildly outrageous assumptions about the business to end up with a SP that is significantly lower from here.

These two charts kind of tell me a lot about the whole industry, although they pertain to MND. The trend from 2003 on is pretty clear as is where MND was before the boom. Coming off a super-cycle like we have had it just seems to me like there will be one almighty hangover for this industry and despite how well managed MND they will feel it. I kind of think of mining services as flowers in the desert; when it rains they can look amazing, but it doesn't last.

 

[Julia]

For me Julia there is no reason to sell, to respond in order to your points, a loss is not made until I sell, and in general a loss is unacceptable full stop. The point at which I would sell would be if the fundamental reasons I bought changed to the extent that i could no longer justify holding. Its never "too late now to sell", its very often too soon to sell in my view. If you sell everytime the market, or a share drops you will realise a lot of losses! Finally I am not emotionally invested, I am rationally invested. The fundamentals of MND are compelling IMO, I do take a contrarian view of the extent and length of the impact of the mining industry coming to the end of a boom cycle and I am also more than happy to hold thru cyclic markets like the resources sector.

Thank you for explaining your approach. I respect your right to it, though rather hope you note McLovin's remarks.

I suspect that you are more asking from a trading point of view than an investing one, but I thought I would share my thoughts regardless.

Glad you are prepared to share your thoughts: that's what makes the forum interesting.
But re my asking from a trading pov rather than an investing one, actually no. I've had a few goes at short term trading over the years with only mediocre results, so don't do that at all these days, along with no investment in airlines or miners.
I'd be happy to invest in MND again (made good $ from it in the past) but will never, ever buy into a downtrend, especially when the whole mining/services sector is looking lumpy to say the least.

Wysiwyg, thanks also for your response. Any questions I ask are based entirely on interest about how other people do what they do and the reasons why, not any sort of prurient curiosity.

 

[luutzu]

You certainly need a contrarian view of the sector to see them as a bargain! I have that view, but I know its not commonly shared. What is hard to dispute is that of the mining services companies, MND are in one of the strongest positions, a good balance sheet, low debt, and reasonable prospects given the downturn in the sector overall.

Even allowing for a continuing decrease in dividends in line with lower earnings thru this part of the cycle, they will return very healthy yields and the prospect of price growth as the sector improves over time if you pick them up at current prices.

Contrarian is putting it lightly given current trend. I think "ballz of steel" suits better - and you and I and a few others might have it; that or brain of steel .

Just bought a fair chunk of it today. Right after the order went through at $10.70 it drops 8 cents, so good omen

 

[galumay]

Thank you for explaining your approach. I respect your right to it, though rather hope you note McLovin's remarks.

No drama, also I always read McLovin's comments with interest, he is more pessimistic than I on the outlook for the sector, my beliefs are biased by my close involvement in the industry for the last 35 years, Mono's are one of the best contractors in the game, everyone uses them, and I know how much work there is for contractors in this game even in a slowing of the boom and transition to production from construction.

Glad you are prepared to share your thoughts: that's what makes the forum interesting.
But re my asking from a trading pov rather than an investing one, actually no. I've had a few goes at short term trading over the years with only mediocre results, so don't do that at all these days, along with no investment in airlines or miners.
I'd be happy to invest in MND again (made good $ from it in the past) but will never, ever buy into a downtrend, especially when the whole mining/services sector is looking lumpy to say the least.

I am with you on no miners or airlines, my only weakness is a couple of mining services providers!!

I guess the significant difference in approach is I love buying into a downtrend!

 

[McCoy Pauley]

Several points I've picked out of the slide pack from the AGM:

* Revenue is highly geared towards engineering and construction (71.4% compared to 28.3% for maintenance and industrial services, and 0.3% for Skystar, which MND has since sold);
* MND has won $1.34b of new contracts in engineering and construction and $415 million of new contracts and extensions in maintenance and industrial services. Given the pressure on costs in the resources industry, I wonder how much MND has had to reduce the bid and therefore compress margins - skc assumed a fall of margins to ~5%, that could be optimistic, particularly in the engineering and construction division;
* A significant amount of MND's revenue is still derived from the Pilbara (see page 12 of the slide pack) and a significant amount of new contract wins come from the LNG fields in Darwin and Queensland (see page 13 of the slide pack);
* By market, MND derived 41% of revenue for FY 2014 in energy, 57% from resources and 2% in infrastructure. So while MND is diversifying away from its resources base (89% in FY 2008), unfortunately energy prices are falling hard as well; and
* MND wants to build new markets for itself in marine, power, water and transmission pipelines, and to expand internally. If MND can't execute, that's a recipe for trouble.

 

[McLovin]

No drama, also I always read McLovin's comments with interest, he is more pessimistic than I on the outlook for the sector, my beliefs are biased by my close involvement in the industry for the last 35 years, Mono's are one of the best contractors in the game, everyone uses them, and I know how much work there is for contractors in this game even in a slowing of the boom and transition to production from construction.

You're in a much better spot to know what's going on on the ground than I am. I hope I'm wrong and you're right.

 

[galumay]

You're in a much better spot to know what's going on on the ground than I am. I hope I'm wrong and you're right.

Sometimes thats a disadvantage I think! I really appreciate the trouble you went to post up those graphs, it was food for thought and made me go and look into the numbers in more detail.

I think one of the things that data is masked by is the massive size of infrastructure growth in the country as a result of the boom, if you look at mining sector production prior to about 2003 and then the massive and incredible growth in production over the next 10 years or so you get a picture of just how much more infrastructure is out there now.

I know from my travelling all over Australia and looking at it the growth has been incredible in the last decade, all over the country in the northern half especially. This infrastructure will need maintenance and replacement and we have yet to see the escalation in that sort of work because most of it is so new.

I dont doubt the sector is still in for a rough ride, but the good companies will pick up work from the ones that cant survive the downturn and then their will be growth in maintenance and replacement as well as a steady stream of construction projects (at a much lower rate).

Have we seen the bottom? Probably some way from it, but I am not looking to find the bottom, I just believe there is a reasonable liklihood of companies like MND & NWH being undervalued at the moment and that I will get a healthy yield while I wait for the price to move back in my favour, I am not in any rush and I certainly wouldnt suggest that there is any quick money to be made in the sector.

Ultimately the rest of the world needs our metals and energy resources and thats not going to change in the forseeable future.

 

[Julia]

That reasoning sounds logical enough, galumay. Hope you're right. Good luck with it. Certainly if you're not worried about your capital investment, the yield is very good.

 

[luutzu]

You're in a much better spot to know what's going on on the ground than I am. I hope I'm wrong and you're right.

I also hope you're wrong and I'm right, but who knows... you might very well be right. But

Another interpretation of your charts could be that given the great growth MND has in its engineering/construction businesses, it could have learnt and develop systems and structure, business contacts/reputation, establish its competitive and financial position, dig its roots further into the soil so that when the rain is over, it could maintain itself for a while yet... and in the mean time expand to where the rain is.

To see the massive growth from a super cycle then conclude that like a desert flower it will whither and die after... that might be true, might be very true for some businesses and MND could be one of that... BUT... what if MND or companies similar to it capitalise on that growth and further enhance itself?

Say a new graduate... been living off Austudy... so income low and first couple of years after graduation still better but not that great. Then the graduate got lucky, his company is booming and he's promoted, took further training, given more responsibilities... basically doing very very well for a decade.

Then the company slows down, can't afford him or most of his colleague.

From looking at the company or its sector, can we conclude that that one time graduate who got lucky will now go back to middle management somewhere or back to his Austudy days?

Depends right? He could leverage the skills and experience, the savings he had earned while time was great... use that and got his way into another sector or build his own business etc. etc.

I'm not saying that this is how MND is or will be... but it's not impossible.

The chances might be zero or slim... but as far as the future goes, I'd bet on a strong business whose management has proven to be very able in its project as well as capital and acquisition management. It might be worthwhile to put capital into business like that and let the able management do what they have been proven quite capable of doing. They might fail but then all businesses could fail, even ones in the most lucrative and booming industry.

 

[McLovin]

Sometimes thats a disadvantage I think! I really appreciate the trouble you went to post up those graphs, it was food for thought and made me go and look into the numbers in more detail.

I think one of the things that data is masked by is the massive size of infrastructure growth in the country as a result of the boom, if you look at mining sector production prior to about 2003 and then the massive and incredible growth in production over the next 10 years or so you get a picture of just how much more infrastructure is out there now.

I know from my travelling all over Australia and looking at it the growth has been incredible in the last decade, all over the country in the northern half especially. This infrastructure will need maintenance and replacement and we have yet to see the escalation in that sort of work because most of it is so new.

I dont doubt the sector is still in for a rough ride, but the good companies will pick up work from the ones that cant survive the downturn and then their will be growth in maintenance and replacement as well as a steady stream of construction projects (at a much lower rate).

Have we seen the bottom? Probably some way from it, but I am not looking to find the bottom, I just believe there is a reasonable liklihood of companies like MND & NWH being undervalued at the moment and that I will get a healthy yield while I wait for the price to move back in my favour, I am not in any rush and I certainly wouldnt suggest that there is any quick money to be made in the sector.

Ultimately the rest of the world needs our metals and energy resources and thats not going to change in the forseeable future.

Hey gal

Thanks for the post. It's always good getting an insider's view. I definitely take on board what you've said, and your point about maintenance capex is certainly very relevant, and one I've considered though not attempted to quantify.

Just to be clear, I don't think MND is going back to where they were pre-2003. My thinking is something along the lines of if revenue falls to say $1.2b (which isn't that difficult to imagine IMO) and margins compress to below 5% then NPAT falls significantly to <$60m. It gets interesting at that point because that's when people start to throw in the towel and the SP can really do some strange things (hence my <$5 sp comment in the other thread on MND).

 

[piggybank]

I'd be curious where you think the bottom of the cycle is, galumay? To me it doesn't seem like you have to make wildly outrageous assumptions about the business to end up with a SP that is significantly lower from here.

These two charts kind of tell me a lot about the whole industry, although they pertain to MND. The trend from 2003 on is pretty clear as is where MND was before the boom. Coming off a super-cycle like we have had it just seems to me like there will be one almighty hangover for this industry and despite how well managed MND they will feel it. I kind of think of mining services as flowers in the desert; when it rains they can look amazing, but it doesn't last.

View attachment 60352

Hi McLovin,

Do you make those tables up yourself or do you have to subscribe to a site in order to obtain them?

Thanking you in advance of your reply.

Regards
PB

 

[DeepState]

Actual and consensus capex profile from BHP-AU




Same deal for RIO-AU




Same deal for FMG-AU




etc.



And then from the RBA from a speech this week by Stevens at CEDA:





I do not believe that the RBA is expecting a V-shaped recovery at the end of the forecast period.


An assumption of no growth, or even only slight declines, in any part of investment assessment is wildly at odds with what is clearly observable and assessable. The outlook is outright poor. Embedded in the above is an allowance for still high levels of capex for LNG developments for the time being. The miners are the ones spruiking about EM demand coming from India etc. on top of existing demand from China. So it is not as if there is a hidden China in the world which has not yet discovered they need ore and coal. They have also over-invested as a whole, as occurs though a cycle peak.

Perhaps the way to reconcile the poor outlook above and a possible organic outcome which is not traumatic is to believe that cost overruns will be gigantic relative to budget. Not sure how strong a case that is though.

The constant remains...what is this thing worth? A poor operational outlook does not make something a bad investment.

 

[luutzu]

Actual and consensus capex profile from BHP-AU

View attachment 60379


Same deal for RIO-AU

View attachment 60380


Same deal for FMG-AU

View attachment 60381


etc.

And then from the RBA from a speech this week by Stevens at CEDA:

View attachment 60382

I do not believe that the RBA is expecting a V-shaped recovery at the end of the forecast period.

An assumption of no growth, or even only slight declines, in any part of investment assessment is wildly at odds with what is clearly observable and assessable. The outlook is outright poor. Embedded in the above is an allowance for still high levels of capex for LNG developments for the time being. The miners are the ones spruiking about EM demand coming from India etc. on top of existing demand from China. So it is not as if there is a hidden China in the world which has not yet discovered they need ore and coal. They have also over-invested as a whole, as occurs though a cycle peak.

Perhaps the way to reconcile the poor outlook above and a possible organic outcome which is not traumatic is to believe that cost overruns will be gigantic relative to budget. Not sure how strong a case that is though.

The constant remains...what is this thing worth? A poor operational outlook does not make something a bad investment.

What system are those data from RY?

-----

 

[KnowThePast]

I'd be curious where you think the bottom of the cycle is, galumay? To me it doesn't seem like you have to make wildly outrageous assumptions about the business to end up with a SP that is significantly lower from here.

These two charts kind of tell me a lot about the whole industry, although they pertain to MND. The trend from 2003 on is pretty clear as is where MND was before the boom. Coming off a super-cycle like we have had it just seems to me like there will be one almighty hangover for this industry and despite how well managed MND they will feel it. I kind of think of mining services as flowers in the desert; when it rains they can look amazing, but it doesn't last.

View attachment 60352

Great discussion here.

I thought I'd post up some charts on a group of companies for better visibility. Comparison is difficult as many mining services companies listed over the last several years. I've included those that had data since at least 2007, probably forgot a few.

I'll add a chart for market cap as well.

Companies included: MND, LYL, RCR, SWK, NWH, BYL, WDS, SDM, MRM, EHL, ASL





While revenue and ebit are still historically high, and will possibly fall much further, market cap has already fallen to 2007 levels.

 

[Wysiwyg]

Being primarily a construction engineering company, where are the future significant construction projects? Galilee Basin coal, rail and port in Qld. and FLNG/LNG in W.A.

Iron ore is covered for a while. Steel mills, Alumina Plants, Power Stations, Aluminium Smelters? None.

 

[luutzu]

Being primarily a construction engineering company, where are the future significant construction projects? Galilee Basin coal, rail and port in Qld. and FLNG/LNG in W.A.

Iron ore is covered for a while. Steel mills, Alumina Plants, Power Stations, Aluminium Smelters? None.

Not commenting directly on MND as my interests would bias my argument...

I think that looking at the macro level then make general conclusions to individual company below can be dangerous.

Firstly, while geniuses can make close enough projections of general trend over next year or two, beyond that and all projections are pure guesses.

Second, how can you be sure the general projected changes will affect a certain company equally?

Third, how do you know that it won't happen that through genius or luck or hardwork, management will be able to win new contracts in unexpected places, in unexpected fields... they may even acquire and diversify to a different sector altogether before the pain really hit home?



Anyway, it's just opinions and approaches but I'm more comfortable with going bottom up... It's too much work to look at the entire world then figured out where each company fit into which and how they'd likely to do and what their likely moves will be.

It might be better to find good businesses and good management, and let them figured out what is best to do given what they have and what they see.

You and I are capitalist, our job is not running or managing the business, especially ones we see from high up.

--

With construction, or any business really but particularly true in construction... smart operators tend to not go for the lowest priced operator because it is cheap; smarter operators would want their contractors to make a decent profit - not to squeeze them dry and send them broke.

Reason is simple - if your contractor goes broke, your project will be delayed, and it will cost you more. If a bid is cheap but the bidder have a weak financial position or its practices hasn't been proven... it's not worth it to go cheap and end up paying more later through delays etc.; if the bid is cheap and the business is shaky, corners might be cut.

Not all operators are smart so some might just squeeze and hope for the best.. like Multiplex back then and got taken over.