Long-time readers may have seen a number of articles on Fool.com.au late last year that were heavily bearish on the mining services sector.
In short, a decline in activity in the resource sector was going to be a heavy burden to bear for a large pool of businesses that were fighting for an ever-shrinking selection of work. As resource prices fell, businesses stopped expanding their operations and the total amount of work in the sector began to decline.
Notably a couple of companies, Rio Tinto Limited (ASX: RIO) and Atlas Iron Limited (ASX: AGO) even told their contractors they were looking to remove as many costs as possible and asked them to contribute. When you're trying to hold on to your current contracts, what choice do you have?
It's not a happy situation for revenues or margins, and so it was at Monadelphous Group Limited (ASX: MND) in 2015:
- Revenue down 19.9% to $1.869b
- Profit down 27.8% to $105.8m
- Dividends fell 25% to 92 cents per share
- Earnings Per Share fell 29% to 113.9 cents per share
- Gross profit margins remained fairly constant at around 10.4%
- Secured $880m in future work
- Acquisition of Water Infrastructure Group
- Net cash of $186.6m
So What?
Monadelphous noted that the outlook for 2016 wasn't great, with markets expected to remain soft, margins under pressure and opportunities for major new construction contracts likely to be limited.
However, the company has been far more successful at cost-cutting than I expected as it managed to maintain margins throughout the year, though whether this can be maintained if the amount of available work continues to decline is uncertain.
On the plus side, the diversification into water services makes some sense as it leverages the company's existing construction and maintenance expertise as well as shifting to a core utility, away from the volatility of the resource sector.
Now What?
Monadelphous is probably not a buy at today's prices. It looks cheap, trading on a Price to Earnings (P/E) ratio of around 7 and offering a 14.7% trailing dividend yield which could easily lure the unwary.
Over the longer term the business looks likely to survive the transition to a more buoyant resources environment – if it spends prudently – but whether putting your money in a struggling industry for several years is shrewd investing is another question entirely.
