Monadelphous Group Limited (ASX: MND), a leading engineering and construction company, shot up 6.08% on Tuesday, ending at $16.39. Over the past three months the stock was down about 18%, compared to the 2% gain of the S&P/ASX 200 Index (Index: ^XJO) (ASX: XJO). The mining pullback has weakened market sentiment for the mining services industry and Monadelphous Group has been trending down since January 2013.
So why the sudden jump in share price? The company's 2014 full year report came out on Tuesday, showing that despite lower revenue and earnings, the company is making headway in cutting costs. It is also streamlining the business and making up for lost contract work by increasing work related to the LNG export industry.
Past track record and 2014 results
The company has a great record of raising net profit every year since 2004. However, in FY 2014, the reduction of mining work took a bite out of the business, with revenue down 10.9% to $2.3 billion and net profit after tax down 6.3% to $146 million.
LNG export industry
It may have been a relief to some investors that earnings were down only by this much, but what probably sent the share price up strongly was the increase in work related to the LNG industry. 70% of the new contracts are in oil and gas, including the company's largest ever construction contract connected with the Ichthys LNG project in Darwin.
Also, three construction contracts in coal seam gas projects for the APLNG project in Queensland showed how the company was shifting away from mining following the pullback. These may not offset all of the lost mining work, but it potentially puts a floor under the company's business and share price.
Share price and dividend
The company stated that there may be more revenue weakness, but possibly the worst is behind the company. Currently the stock is offering a whopping 8.3% fully franked dividend yield. That may sound fantastic, but the share price could slip back down if earnings decline further. This is how some contrarian investors can make good long-term returns, by picking up beaten-down stocks at cyclical low points and waiting for their recovery.
