Engineering business Monadelphous Group Limited (ASX: MND) continues to suffer the fallout of a weaker commodity environment, with its revenues and profits crashing in the six months to 31 December 2015.
Here's what you need to know:
- Revenue fell 30% to $737 million
- Net Profit After Tax (NPAT) fell 38% to $37.6 million
- Earnings per share of 40 cents
- Interim dividend per share of 28 cents per share (4.7%)
- Ongoing cost saving focus, including reducing staffing levels
- International opportunities in NZ and US markets
- Cash of $202m and total debt of $18m as at 31 December 2016
So What?
Monadelphous and competitors continue to struggle from declining capital expenditure as well as a tighter focus on costs. Not only is this shrinking the pool of available work, it's also pressuring margins, which means Monadelphous earns less on the work it does do.
Low debt and a high cash balance have become a blessing for shareholders, making the business unlikely to go bankrupt and allowing recent diversifications into water services and the United States. This helps keep the business ticking over until conditions improve.
Management also reported $1 billion in new work, mostly maintenance contracts, over the next 3 years across a wide variety of commodities including water, coal, alumina, base metals, oil, coal seam gas, and LNG. The vast majority (53%) of Monadelphous' revenues came from 0il and gas customers in 2015.
Winning new contracts is a sign of faith in Monadelphous' business offering, as well as its persistently low injury rates and ongoing cost-cutting efforts. Management has identified a further $24 million in annualised cost savings that can be achieved going forwards.
Now What?
While it might be tempting to start trying to pick a bottom for the industry, investors should be aware that this could prove quite hazardous to your wealth. There's no guarantee that revenues, profits, and dividends won't fall further in the meantime. Even if you successfully pick the bottom in Monadelphous' share price, you could be stuck with underperforming shares for several years as you wait for commodity prices to rebound. This is because of the lagged relationship between commodity prices and construction activity.
First, commodity prices fall, which doesn't have any impact on construction and maintenance revenues until several months later when people realise the falls won't recover in a hurry. Then contracts aren't renewed, projects are cancelled, and others come under price pressure.
This cycle works in reverse when commodities pick up – shareholders shouldn't expect a lift in construction activity until sometime after commodities rebound because of the time required for companies to become certain that higher prices are here to stay.
As a result, I would not buy Monadelphous shares today even though I consider it to be one of the better mining services companies out there.
