Icarus Signal New Entries: Monadelphous

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Update on share prices and consensus price targets.

By Rudi Filapek-Vandyck, Editor FNArena

By now, I assume, you are all aware of the existence of a company called Monadelphous ((MND))?

In simple terms, Monadelphous is the ultimate gift that keeps on giving. It's the Champion amongst champions. It has been, by far, the most profitable investment decision any investor could have made over the past decade – second to none. Which is why Monadelphous has been on my personal radar for years and why the company has featured in quite a few of my analyses and stories in the past.

Unluckily, for most investors, the provider of services to iron ore and coal miners, and to the rising LNG industry in Australia has been flying under the radar for most of those ten years. So while everyone was trying to secure his or her piece of BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)), management at Monadelphous was quietly turning loyal shareholders into millionaires; literally! (I think I have met two of them throughout the years). Most stockbrokers have only added the stock to their research universe in the past two years.

If you are amongst the many buyers of a lottery ticket every week, you'll probably find it depressing to know that an investment of only thousands of dollars in Monadelphous shares ten years ago would have been sufficient to be a member of the millionaires club today.

This week management again beat market expectations and expressed confidence in the ongoing strong outlook for the company. Day-to-day price movements aside (today is one of weakness), Monadelphous shares entered the calendar year around $20. They are trading above $22 on the day after the release of FY12 results. While updated price targets by stockbrokers suggest only limited upside from here onwards, it has to be noted that today's Price Earnings ratio of less than 14 is well below historical averages; plus the prospective dividend yield (fully franked) is better than what most of the major banks are offering at 6.3% and 6.9% respectively for the two years ahead.

One of the reasons why Monadelphous has at times featured prominently in my analyses is because its total investment return includes solid, growing dividends, uninterrupted, year after year after year. The share price may have multiplied by 21x in ten years, the growth in dividends has been equally spectacular with the payout increasing from 6.25c in 2003 to a projected 139.5c this financial year (an increase of more than 2000%).

Amidst all the hullabaloo about "the end of the equities culture", "the end of Buy and Hold" and the persistent underperformance of Australian equities, Monadelphous shares are up more than 10% since the beginning of the year, dividends not included (add circa 6% if you include the upcoming final payout).

All this raises the obvious question: when will this success story come to an end? Nothing this good can last forever,can it?

Probably not. Most shareholders would certainly feel less comfortable if the current management team decided to call it quits (there have been rumours) and there is, of course, the ongoing prospect of two more years of strong capex spending by miners and LNG producers in Australia, but what's next?

Well, under a worse case scenario the amount of work available post 2014 will resemble something of a fall off the cliff experience and we can only assume this won't leave even a company such as Monadelphous unaffected. Which is why stockbrokers covering the company are now more divided about what valuation multiple and what rating should apply given the limited visibility post 2014. Observe that the lowest price target in the FNArena database is $17.69 from JP Morgan while uberbull RBS is happy to go as high as $27.84.

I think both will be proven wrong. If Monadelphous' historic record is anything to go by, there's no reason to go doom and gloom as JP Morgan does, but given only two more years of (virtually guaranteed) strong growth ahead, I very much doubt whether investors will allow a return to a high double digit PE ratio.

Which brings us to the question of the day: what then can we expect from Monadelphous from here onwards?

Post all the updates after yesterday's FY12 release, the consensus price target doesn't reach higher than $23.30, which suggests 4.4% upside plus dividends (still a double digit return, mind you!). Even if we exclude JPM and RBS -the two outliers- from our calculation, the consensus price target doesn't reach higher than $23.36. I wouldn't be surprised to see the share price trade at a premium to this "ceiling", as it has done on many occasions in the past. So there remains potential for upside surprises.

On the flipside, I also suspect investors will increasingly start realising the golden age of owning shares in Monadelphous is now well and truly behind us. While double digit returns are still possible in each of the next two years, it will be closer to 10% than to 20% and there is now a real danger that shareholders will start jumping ship at some point in 2013, which could become a real headwind for the shares.

Yesterday's surge in the share price pushed Monadelphous shares onto the Icarus' radar, together with the likes of ResMed ((RMD)), Flight Centre ((FLT)) and Kathmandu ((KMD)). One other appearance that caught my attention was National Australia Bank ((NAB)) now at less than 2.2% from the consensus target. (Regular readers of my analyses know why I watch the banks).

There are now 40 stocks within reach of their price target, while the list of stocks trading above target is even larger; 91 in total. Yesterday AMP ((AMP)), Telstra ((TLS)), Cardno ((CDD)), ASX ((ASX)) and Credit Corp ((CCP)) joined the likes of Breville Group ((BRG)), Ardent Leisure ((AAD)) and Coca-Cola Amatil ((CCL)).

I think that's sufficient to put out a warning to investors looking to join the rally tomorrow or next week: not everything's cheap in today's share market. On the ultra-cheap side of the market (Bottom 50 according to Icarus) we find names such as Azimuth Resources ((AZH)), Rialto Energy ((RIA)) and Aquarius Platinum ((AQP)) – these stocks also deserve a warning. Be careful in assuming cheap equals future value. There's probably a very good reason why Mr Market has allowed these stocks to trade well below potential.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Stocks Above Consensus

Top 50 Stocks Furthest from Consensus

To see the full Icarus Signal, please go to this link

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