Forum Topics MND MND MND valuation

Pinned valuation:

Added 5 months ago
Justification

@Bear77 You've piqued my interest in Monadelphous. It used to be a market darling 11 years ago when the share price peaked at $27.85. I’ve owned it in the distant past and remember it as a high quality business.

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Source: Simply Wall Street

I was surprised to see how much the metrics have deteriorated over the last 10 years. ROE has slowly deteriorated from +30% to 12.2% last year. According to analyst consensus FY24 ROE will be c. 13.6% increasing to 17% over the next 3 years. It is still debt free and holds $263 million in cash.

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The Book value hasn’t changed much in 6 years, increasing from $4.19 to $4.62 on Dec 2023. That’s not a good sign.

The margins aren’t amazing either. Gross profit margin is just over 7% and Net profit margin just under 3%.

Valuation

With the deterioration in ROE, I think we can forget about the high PE valuations of the past.

Using McNiven’s Formula assuming forward ROE of 17%, equity of $4.62 per share, 88% of earnings paid out as fully franked dividends (c. 4.5%), and requiring an annual return of 10%, I get a valuation of $9.40. At the current share price of $12.33 you might expect a return of 9.1%.

Just looking at @Bear77’s suggested entry point of $10, the annual return should be around 11.4%, which would be OK.

I think Monadelphous would be good buying at $9.50 to $10 per share, but there might be better businesses in this sector now.

Not held

Bear77
Added 5 months ago

Yes @Rick - my thoughts exactly, both the deteriorating fundamentals, and the MND buy zone being under $10. I used to buy them at around $10 or below and then either trim or sell out at $12 or above - but they are no longer one of the best companies on the ASX - not by a long shot - and the two guys I admired most have gone - well, one retired and then died (John Rubino) and the other moved from the MD role to now Exec. Chair. (Rob Velletri) - and both had previously sold down the $20m+ worth of MND that they each held at significantly higher levels. Velletri has since built his holdings back up at lower prices - he now holds 2,234,961 MND shares (worth around $27.6m at today's closing price) + another 150,000 options.

Two negatives for me are (1) I don't know much about their new MD, Zoran Bebic, and (2) they rip off a lot of their workers on superannuation - they get around a section of the superannuation guarantee (SG) legislation that stipulates that super be paid on all "ordinary hours worked" - so not overtime - and that allowances that are always paid on those ordinary hours are regarded as part of the ordinary hours pay for SG purposes. MND have most of their workers on an enterprise agreement that allows them to not pay any super on any hours for which any penalty rates apply or would normally apply, so people working regular 10 hour days get 7.6 hours per day or 8 hours per day of super as the company regard the other hours as overtime, even if overtime rates don't apply to those hours, so people working 4 x 10 hour days per week do not get any super on at least 8 of those hours (last 2 hours each day). They also don't get paid super on regular allowances like site allowances that apply at many minesites and other construction sites and other sites around the country. The thing that bugs me (and many of their employees) is that MND claim these entitlements from their clients (the site owners) but do NOT pass all of them through to their workers because of the loopholes they are exploiting. Which is apparently completely legal. They have been taken to court over this at various times but these cases are either settled out of court, or are still ongoing, not sure which, but we only hear that they have been taken to court over it, never about the outcomes.

They are making millions of dollars through claiming stuff for their employees and then keeping it themselves. So the capitalists out there are going to aplaud this behaviour and say that's what responsible management SHOULD be doing. That's one argument. Another is that companies like this thrive on reputation. And that reputation is best if they complete work on-time, in-full, and to standard. Pissing off their own workers doesn't lend itself to that happening as a matter of course. For instance, one of their workers burned down a Rio Tinto facility a few years ago after starting a fire while using an angle grinder (or welder, one or the other) and he still works for MND today. He claimed he followed their procedures and their procedures were not adequate. So he kept his job. My brother was talking to a guy recently who knows him and knows the story. My brother has also worked for Mono's on and off for years, along with a bunch of other contractors and he says that Mono's are the only ones who do that to their workers (the super stuff) - none of the other companies do - the other companies all pay correctly, including super, and for the most part they treat their workers with respect which clearly includes paying them what they are entitled to and by that I mean what the government meant them to receive when they drafted the superannuation guarantee legislation and what the site owners agree to pay for the workers and contractors, not what Mono's can't legally get out of paying them.

Anyway, I'm not the MND-fan-boy I once was. Older and wiser. And MND aren't the company they used to be either.

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Rick
Added 5 months ago

Some interesting inside stories @Bear77and probably more reason to stay clear.

I liken these types of businesses to the metaphor “How to Boil a Frog”. The essence of the story is “if a frog is put suddenly into boiling water, it will jump out, but if the frog is put in tepid water which is then brought to a boil slowly, it will not perceive the danger and will be cooked to death”.

In the case of Monadelphous I don’t think you’ll be cooked to death. However, you may not notice the declining return on equity as the earnings jump around in a gradual decline, and you might keep applying the same PE ratio associated with its past success. It tends to look cheap for a very long time, until you realise it’s no longer a high quality business and the PE deserves to be a lot lower. So you get hit with a double whammy, lower earnings and a lower PE.

That’s why I’m very wary of declining return on equity patterns. I’ve been “boiled” a few times before. ;)

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Bear77
Added 5 months ago

Yes @Rick - good analogy. Then there's this: https://www.capitalbrief.com/briefing/monadelphous-shares-fall-as-albemarle-terminates-lithium-production-at-kemerton-893f775b-d6d2-4b21-a667-7cca60d40dac/

Mono's estimates that its contracted construction works on the project at Kemerton [just north of Bunbury, in the SW of WA, and south of Perth] are currently 15% to 20% complete, and the termination of the contract reduces the company's current construction work-in-hand by approximately $200 million.

The context: Monadelpous said it had been notified this morning [Thursday August 1st, 2024] that its contracts at Albemarle's Kemerton project have been "terminated for convenience by Albermale".

The termination follows Albemarle's recent announcement that it will undergo a "comprehensive review" of its asset and cost structure amid tumbling lithium prices globally.

Monadelphous was contracted to construct the front-end pyromet works associated with two new lithium processing trains and a multidisciplinary package for the utilities and reagents scope.

The company said it has been formally notified that the termination of the construction contracts will take effect on and from 12 September. Ambemarle has also terminated Monadelphous' maintenance services and sustaining capital projects contracts, it said.

What they said: Albemarle chair and CEO Kent Masters said: "Given the dynamics of the global markets we serve, we must be able to pivot and pace as necessary to maintain our leading position".

--- end of excerpt ---

As the MoM poddy mentioned yesterday, it shows just how shrewd Chris Ellison was to have re-jigged MinRes' JV and ownership structure with Albemarle one year ago - see here: https://www.mineralresources.com.au/news/simplified-marbl-jv-agreement-reached/ so that Albemarle moved back to 100% ownership of Kemerton (the lithium hydroxide processing plant, with multiple trains either trying to produce or under construction, and nothing working as planned thus far) while MinRes increased their stake of the Wodgina hard-rock lithium mine and also received over half a billion Australian dollars from Albemarle for giving up their (MinRes') stake in Kemerton.

Imagine what MinRes' balance sheet might look like now if they still owned 15% of Kemerton. MinRes had already reduced their stake to 15% before that deal announced in July 2023 (link above) that reduced their exposure to 0% in exchange for an increased stake of Wodgina and $380-$400 million US$ (over half a Billion A$).

Further Reading: https://www.monadelphous.com.au/media/5861261/240801-asx-announcement-albemarle-contracts-update.pdf

And: https://www.afr.com/companies/mining/us-blocks-subsidies-for-albemarle-lithium-made-in-australia-20240802-p5jyux [August 1st, 2pm - yesterday afternoon, AFR]

And: https://investors.albemarle.com/news-and-events/news/news-details/2024/Albemarle-Announces-Asset-and-Cost-Actions-toEnhance-Competitiveness-and-Proactively-Respond-to-Dynamic-Market-Conditions/default.aspx [Albemarle announcement, July 31st, 2024, two days ago]

Lithium market looking grim for anybody tied up with the Chinese, as Albemarle are with Tianqi at Greenbushes and Kwinana - along with IGO.asx.

Mono's rode the wave of Iron Ore mine expansions after the wave of LNG plants that were built around the north and east coasts of Australia a few years back, and the mining boom prior to that LNG boom, however things are a lot quieter for them now, so this Kemerton contract was quite significant for them, and to be stood down so quickly with bugger all notice is a major setback for them. Diversification of revenue is good, but only if the revenue is there to procure, and when you're as big as Mono's got to be, you need big contracts to move the dial, and there aren't too many of those around any more. They need another boom. In the absence of that, the decline in their fundamental metrics is likely to continue south-bound I would think.

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