Should you buy shares in Monadelphous Group Limited?

CIMIC Group Ltd (ASX:CIM) shares surge after a trading update to spread positive light on the construction services sector.

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Shares in CIMIC Group Ltd (ASX: CIM) (formerly Leighton Holdings) surged almost 9% on Wednesday following the release of a strong 2016 full-year result.

The construction giant reported full-year net profit after tax (NPAT) swelled 11.5% to $580.3 million to come in at the top-end of previous guidance. Fourth quarter sales revenue increased 17.8% alone (versus the third quarter of 2016) to provide management reason to foresee a "bright outlook for 2017 and beyond".

Accordingly, management now forecasts full-year 2017 NPAT of $640 million to $700 million, representing growth of 10% to 21% on prior year numbers.

Given this is the second construction services company in as many weeks to provide a positive surprise, I thought it was worth looking into fellow mining and construction services provider – Monadelphous Group Limited (ASX: MND) – to see if investors should expect similar upside.

The industry

CIMIC's blockbuster results come hot on the heels of peer Downer EDI Limited's (ASX: DOW) trading update last Thursday. As I wrote here last week, Downer shocked the market after providing an unexpected profit upgrade as the company saw work-in-hand increase 13%.

After Downer's management forecast an increase to 2017 NPAT above prior guidance investors in the construction and mining services industry may begin to wonder whether the upgrade trend will spread to competitors Lendlease Group (ASX: LLC) and Monadelphous.

Signs of growth

It's no secret that the construction and mining services sector has experienced a torrid few years as the unwind of the mining boom and reduced infrastructure spend by governments has seen the bottom line of services contractors plunge.

Whilst a broad based rebound in commodity prices, and unprecedented planned infrastructure spending by global governments is likely to benefit all mining and construction services contractors, I find it difficult to see how Monadelphous will benefit further from here.

About Monadelphous

In the past 12 months, Monadelphous' shares have increased a whopping 75% (from $6.18 on 8 February 2016) as strategic investments in the renewable energy and minerals processing sector diversifies its operations from Monadelphous' former energy and raw materials focus.

Although the company lacks the civil and commercial infrastructure exposure of CIMIC, Downer and Lendlease it has enjoyed a number of notable contract wins in the water infrastructure (worth c.$250 million ) and industrials maintenance sub-industries to set expectations for NPAT growth in 2017.

The start-up and production phases for major LNG projects should assist earnings further as maintenance demand increases, justifying the recent surge in share price in my opinion.

However, given Monadelphous' reliance on the highly cyclical resources and energy markets, I am not expecting massive surprises when it reports half-year 2017 results later this month.

Foolish takeaway

Whilst the positive surprises from both CIMIC and Downer reveal the construction industry is experiencing signs of growth, I can't guarantee Monadelphous will enjoy the same upside given its leverage to energy markets.

Although the uptick in oil prices, and recent acquisitions to diversify its operations should insulate Monadelphous against earnings attrition, I don't believe the stock is a buy today given the circa 75% gain in price over the last 12 months.

Therefore, whilst today's share price leaves plenty of upside room should Monadelphous' results surprise, I don't believe its most recent price of $10.80 justifies the downside risk associated with investing in the mining and construction services sector. As such, I rate the stock a hold.

Motley Fool contributor Rachit Dudhwala owns shares of Monadelphous Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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