The Monadelphous Group Limited (ASX: MND) share price is finally trending in the right direction after UBS upgraded its recommendation on the mining engineering contracting group.
The MND share price surged 5.1% to $15.54 in morning trade to become the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The Nearmap Ltd (ASX: NEA) share price is a distant second with a gain of 3.6% to $2.62, while the Magellan Financial Group Ltd (ASX: MFG) share price is in third spot with a 2.8% increase to $52.30.
The new value buy
Monadelphous' big gain is probably due to UBS after broker upped its rating on the stock to "buy" from "neutral" with a 12-month price target of $18.15 a share.
"Over the past 3mths the Monadelphous share price has declined c.20%. The stock is trading at a 1yr [forward] P/E of c.17x (UBSe), which is a 17% discount to the ASX200 Ind. (ex-fins), vs. a through cycle ave. discount of 3%," said the broker.
"Our above consensus EPS forecasts are supported by a bottom-up analysis of the WA iron ore capex pipeline, and imply a 3yr EPS CAGR of 23%."
Monadelphous is cum-consensus upgrade?
UBS is also confident about its bullish 20% plus sales growth estimates for the group as it transitions from LNG construction to iron ore mine replacement and sustaining projects. Monadelphous is a leader in the WA iron ore sector and holds around a 60% market share of the iron ore mine replacement projects.
"We expect Monadelphous to leverage this market strength as it pursues its share of a revenue pool that we think could equate to c.A$3bn across mine replacement and broader sustaining capital projects," added UBS.
"Our updated analysis post the FY19 result indicates that up to 87% of our FY20e sales forecast may already be secured by long-term Maintenance contracts or Construction projects awarded through FY19 and FY20 (YTD)."
Possible cap raise
It's also worth noting that Monadelphous could be a potential acquirer of assets. Downer EDI Limited (ASX: DOW), Cimic Group Ltd (ASX: CIM) and Lendlease Group (ASX: LLC) are believed to be preparing to divest their engineering businesses.
Depending on the timing of these spin-offs, potential buyers could get a good price for these businesses.
If the Monadelphous share price continues to surge ahead, it wouldn't surprise me if the group undertook a capital raise to fund the takeover of some of these assets.
