Multidisciplinary engineering firm Monadelphous Group Limited (ASX: MND) released its financial report for 2016 this morning and the details are not pretty. Revenue fell 26.8% to $1.4 billion and net profit after tax fell 36.7% to $67 million.
The weak performance was driven almost entirely by the company's Engineering Construction division which saw revenue plunge 39.2% to $757.6 million. Meanwhile, Maintenance and Industrial Services revenue fell 2.1% to $608.4 million.
The resources industry has been hit by falling commodity prices over recent years and this has led to less work for the likes of Monadelphous. At the same time, the work that is available is generally at lower margins than in the past as producers have sought to cut costs. Consequently, many mining services companies such as Ausenco Limited (ASX: AAX) are firmly in loss making territory and others such as WDS Limited and Forge Group have gone bust.
However, Monadelphous is one of a rare breed that have managed to keep their heads above water despite the market turmoil. The company signed $1.1 billion of new contracts during 2016 and has $186 million in cash after debt and so looks like it will be one of the survivors even if conditions worsen again from here.
Furthermore, it declared total fully franked dividends of 60 cents in 2016 equating to a substantial 5.5% yield at current prices. So in theory if you bought shares in Monadelphous today, you'd get paid a term deposit beating dividend yield whilst waiting for industry conditions to improve. Should that happen then Monadelphous would be well placed to prosper as many of its old competitors would have been wiped out.
Mind you, there's always the risk that things don't improve for decades. Just because the resource industry is cyclical, that doesn't mean those cycles are regular. For instance, the most recent boom was caused by unprecedented demand from China and there is no guarantee that a similar event will arise in the next decade.
And in my view this is the fundamental problem with all companies in the resources industry, they are beholden to commodity prices that are impossible to predict. No doubt Monadelphous is one of the best run engineering firms around, its track record proves that, but at the end of the day it is a business that is not in control of its own destiny. It doesn't matter how good management are, they will never be able to change that.
