Consensus community valuation
@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.
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.
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
17-Oct-2022: Mono's have released their Annual Report today - which you can view here: https://www.monadelphous.com.au/media/5840751/221017-2022-annual-report.pdf
They have also announced that 30-year veteran Executive Chairman John Rubino is retiring, as is Peter Dempsey who has been a Non-Executive Director of MND since May 2003, so for over 19 years.
Following Mr Rubino’s retirement (these changes are all effective from the date of MND's AGM, which is Tuesday 22nd November), Rob Velletri, MND's Managing Director, will take on the role of Executive Chairman of the Board of Monadelphous Group Limited. Rob joined Monadelphous in 1989 as Group General Manager after having commenced his career at Alcoa. He was appointed to the Monadelphous Board on 26 August 1992, assuming the role of Managing Director on 30 May 2003. Rob is a mechanical engineer with more than 40 years’ experience in the construction and engineering services industry and is a member of the Institution of Engineers Australia.
Under his guidance as Managing Director over the past 19 years, Monadelphous has become one of the most respected engineering services providers in Australia. The Board unanimously supports Mr Velletri’s appointment to the role of Executive Chairman noting his thorough knowledge of the industry, the Company and its stakeholders, his demonstrated commitment and dedication to Monadelphous and the significant and valuable contribution he has made to Monadelphous for in excess of 30 years.
Mr Zoran Bebic will take on the role of Managing Director of Monadelphous Group Limited at the conclusion of the 2022 AGM. Zoran is a highly experienced senior executive, having worked at Monadelphous for almost 30 years across a broad range of operational, financial and management roles. He is a Fellow Certified Practicing Accountant and holds a Bachelor of Business with a Double Major in Accounting and Finance. He commenced his career with Monadelphous in 1993 and has held various corporate and operational roles over that time. In 2009, Zoran was appointed to the position of Chief Financial Officer and Company Secretary, and since 2014 has been the Executive General Manager of the Company’s Maintenance and Industrial Services division.
During Zoran’s time at the helm of Maintenance and Industrial Services, the division has become a leader in the planning, management and execution of multidisciplinary maintenance services, sustaining works and turnarounds to the resources and energy sector. Through this period, the division has almost doubled sales revenue to over $1 billion per annum and strategically broadened its scope of services, geographies and customer markets.
The Board unanimously believes that Zoran’s personal attributes, Company and industry experience, financial acumen and deep understanding of the markets in which the Company operates makes him the ideal candidate to take on the role of Managing Director, working closely with Mr Velletri.
--- end of excerpt ---
You can read the full announcement here: MND-Board-Changes.PDF
This is typical of Mono's - which is one of my favourite companies - they have succession plans in place and they promote from within, so people who have been with them for decades already and know the business inside out are the ones who step up as roles are vacated, and the two guys that are leaving are retiring rather than going elsewhere.
John Rubino still owns over 1 million MND shares, currently worth over $14m (1,022,653 shares @ $13.95/share - being today's closing price = $14.26m), and he has sold some along the journey as well.
Rob Velletri owns over 2 million MND shares plus 525,000 options. Zoran Bebic will be lodging an initial director's interest notice around the time of next month's AGM, when he officially takes on the MD role, but as their current Executive General Manager of Mono's MIS (Maintenance and Industrial Services) division, since 2014, MIS being their largest division now by revenue, and their fastest growing division, I'm sure he's got a few thousand MND shares already.
MND have two divisions, Engineering Construction, and Maintenance and Industrial Services (MIS), with MIS now having eclipsed EC in terms of revenue and earnings.
Zoran Bebic, MND's current Maintenance and Industrial Services (MIS) Division Executive General Manager, will become their new Group Managing Director from the the 22nd November (MND's AGM).
https://www.linkedin.com/in/zoran-bebic/?originalSubdomain=au
221017-2022-annual-report.pdf (monadelphous.com.au)
Disclosure: I hold MND shares IRL and here on SM. One of my favourite companies, however up around $14, not one of the ones with the most obvious upside from here, so I've reduced my exposure and instead increased my exposure to companies that are more undervalued by the market. I'm happy with the Board changes announced today.
March 2019: New 6 month price forecast of $18.50. Previously, my forecast was $16. They've shot straight through that to over $17. MND are the best engineering construction and infrastructure services company listed on the ASX. They never have any net debt. Always pay a decent fully franked dividend. Superb management that have a great deal of their personal wealth tied up in MND shares. MND are no longer reliant on mining cycles for work, having successfully diversified into infrastructure construction, operations and maintenance. Major contract wins (over $100m) will each raise the valuation, as they occur.
Update - 12-Jun-19: I'm comfortable with MND trading here between $19 and $20, but if they blow through $20 without any major new contracts I'll be selling some more of my MND holdings - I have them in all of my portfolios, including in my SMSF. However, even if they shot up to $50, I will likely always hold some MND - they are THAT good. I just tend to hold more when they're down around $14, and less when they get up to these $19+ levels.
04-May-2020: New 12-month PT for MND is $14.77 (by November 2020) rising to my original $18.50 PT within 18 months (by November 2021). Today, they are trading down near $9 after providing a business update to the market just after 3pm on Friday. They are closing down their underperforming NZ Water business and they are experiencing delays and project deferrals - as well as some "shuts" (maintenance shut-downs) being deferred by some clients, so plenty of short-term headwinds, but nothing structural. These are all temporary issues, and whenever MND drop below $10, I usually load up. Today is no exception.
02-Nov-2020: I've lowered my 6-month PT for MND to $14.20 today, purely because of the recent negative global growth and the deterioration in the global growth outlook, which is impacting on both the mining sector and the mining and engineering services sectors here in Australia. While MND are busy enough with a decent order book (ongoing work, including substantial recurring revenue from operations and maintenance contracts across the mining and infrastructure sectors), what tends to drive their share price is large project wins, and those have been few and far between of late.
As the largest player in their space, they tend to get a lot of broker and analyst focus, and when sentiment is down, so is their share price. They could turn on a dime if sentiment improves significantly, however, realistically, they're unlikely to reach previous highs any time soon, so I'll settle now for a lower price target. Having averaged down a lot, and then done some trading within a range they were trading within earlier in the year, I'm still doing well with MND, however, I see significant upside from here, so they remain one of my largest positions in my real-life portfolios.
Very high quality company, and very well run, currently in a tough sector, but the sector is cyclical, and the time to load up on cyclical companies is at the bottom of the cycle - or near the bottom - and that would be here - in my opinion.
03-May-2021: funny old world, eh! When I wrote the bit directly above, about MND being at the bottom of the cycle, from a share price perspective, it was November 2nd, 2020. And, yep, they did rise nicely from that $9.16 point up to $15.28 (on Dec 9th), so they put on +66.8%, and in a fairly straight line too, and in about 5 weeks. They've since drifted back down to $10.09 in late March , and they're now heading north east once again, and trending nicely. Gotta love those cyclical stocks, particularly those who have these little mini-cycles within the larger industry cycles.
MND remains one of my favourite companies to hold and to trade. I maintain a core position and trade around the edges of that position. Buy more around $10 or below, buy a LOT more when they go below $9, then trim at $14 and above, but I do not sell out completely, I just reduced the exposure at the higher levels. It's an easy way to make money. And if I get stuck owning a lot of MND shares, I wouldn't lose a wink of sleep. Great management with heaps of skin in the game, best at what they do, industry leaders, always pays a dividend, and always fully franked, always has a huge pile of net cash on the balance sheet, with no net debt, and the market throws this baby out with the bathwater on a regular basis. Beautiful!!
01-Nov-2021: Update: I'm going to drop my PT for MND back to $12.48 for a 12 month target, and $14.20 once again for a 2 year target, so by November 2023. However, let's start with my $12.48 PT to be achieved by November 2021 (i.e. in the next year). I continue to hold MND in all of my main RL portfolios as well as here in my SM portfolio.
They still have the same quality management, and they still have plenty of skin in the game. They need some big project wins to light a fire under the SP once again, but they will come, sooner or later. That's the short term revenue that makes them such a cyclical stock, however they do have plenty of recurring revenue from multi-year operations and maintenance contracts for miners, energy asset owners and for the owners of other infrastructure, such as water treatment plants, pumping stations, etc.
They have irons in plenty of fires now.
03-June-2022: Update: MND are on the move again -
Time to move my price target back up. For further details on my investment thesis for MND, see my recent "#On The Move Again" straw here.
03-June-2022, 10:40am SA time, 11:10am Sydney time. Mono's are on the move again:
MND have always been a core holding of mine, a consistent fully franked dividend payer, and a company that continues to find new markets and make money. Because of their high exposure to large scale construction in the resources sectors (mining plus energy sectors), their revenue and profits can be quite lumpy from year to year. However they have developed a large infrastructure business that has a good amount of recurring revenue. They also have a number of JVs including one with Zem Energy called Zenviron - see here: Renewables (monadelphous.com.au)
I have noticed that since Labor have won the recent Australian Federal election, and the Greens have increased their presence in both the upper and lower houses, AND a number of "Teal Independents" have won seats as well (many of whom have campaigned on the need to urgently address climate change), a number of so-called "green stocks" have had a little uptick on their charts which could be the start of a positive rerating by the market. People having a nibble perhaps.
I do not for a minute think that MND is thought of as a "green stock", as their Zenviron JV represents a very small part of their overall revenue, but I think it might be A factor. Other factors include the need for further expenditure to increase the supply of gas for energy to Australia's east coast, and higher commodities (metals) prices which may result in further expenditure by miners. Another factor is that MND are well positioned to participate in increased infrastructure spending in Australia by state and federal governments. And of course, it might just be that the market is finally realising that Mono's is no longer just a construction company that only does one-off contracts; they have now become a company with diversified revenue from multiple divisions, including a decent amount of recurring revenue from multi-year infrastructure operations & maintenance (and sometimes also management) contracts.
Further Reading:
Water and Irrigation (monadelphous.com.au)
Maintenance and Industrial Services (monadelphous.com.au)
Facilities maintenance (monadelphous.com.au)
Disclosure: I hold MND here, as well as in all of my main real life portfolios. It has always been a core position of mine since I started investing around 25 years ago. I tend to load up on MND when they are sold down, and trim my positions when they are flying. They're not flying yet, but they are on their way back up.