ABN Jumps On The Monadelphous Bandwagon

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This story features MONADELPHOUS GROUP LIMITED.
For more info SHARE ANALYSIS: MND
The company is included in ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

This week’s FY08 results have seen yet another broker picking up coverage on Monadelphous Group ((MND)). While not one of the trading houses in the FNArena database has them at a Buy, everyone seems upbeat about the long term prospects for the company.



ABN Amro are the latest to join the queue, initiating with a Hold and saying the FY08 result “in a year of consolidation” confirmed a number of positive operational and financial aspects – especially strong margins.  However, much like the rest of the market, ABN analyst are cautious in their outlook, pointing out the already full valuation of the stock.



ABN’s target price is $14.25, a discount to the $14.65 the shares are trading at as I write this article. Both UBS and Merrill Lynch are in the same neighbourhood at $15.00, which is, again, not much of a premium to the current price.  All three are maintaining Holds, as are both Macquarie and Aspect Huntley, but neither of the latter have a published target price for the shares (Macquarie did previously but we’re anxiously awaiting the next update).

The only broker on the FNArena database that isn’t positively neutral about the stock is JP Morgan, who has put a target of $12.08 (up $1.00 post result) and is recommending a Sell.

Why the divergence, given even JP Morgan felt this week’s FY result – up 9% on its forecasts- was a good one?

In fact, the broker says that Monadelphous “is a very well run company” and that its “excellent reputation and corporate culture, coupled with its ability to retain skilled staff” will see it continue to win at least its fair share of the work on offer. The analyst also praised the 11.0% rise in profit margins.

It all comes down to the definition of fully priced and the maths behind the models analysts use to assess the value of the stock.

According to JP Morgan, the stock trading is on a multiple of 14.8 times forecast FY09 earnings. The broker points out this is a 10-15% premium to the Industrials sector and would so like to see more in terms of earnings from the company.

New kid on the Monadelphous block, ABN Amro, whose target is also under the current price, has similar numbers. ABN analyst cite FY09 earnings forecasts that put the company on a profit to earnings ratio of 16.1 times, quite high in comparison to its peers. Otherwise, the broker cites good margins (are you sensing a theme?) and “best of breed operational and financial metrics, a strong balance sheet and a highly regarded management team”.

The sentiment is less reservedly echoed by UBS, who notes that demand remains strong, the balance sheet is in good condition – net cash of $112m – and margins continue to trend higher. “We expect continued good results over the next 3-5 years.”

Merrill Lynch analyst go one step further, saying they are convinced by margins and are thinking about moving to a positive long term rating, but they want to see a new phase of revenue growth before they do. They are not swayed (yet) by management’s upbeat outlook commentary, saying it is not unique given the consistently bullish longer term commentary from most mining service providers.

Taking a look at the sector of late, there’s probably some sense in that stance.

The average EPS growth expectation from the four brokers is in the range of high single digit to low double digit, but the message is clear; until there are some more runs on the board in terms of cold, hard cash earnings, there is no reason to jump in when the shares are this expensive.

Given the five holds and one underweight from JP Morgan, the shares sit at -0.2 on the FNArena sentiment indicator, a bit misleading given the upbeat commentary. The target price range is between $12.08 to $15.00. Today, shares were trading 39c, or 2.7% higher at $14.64 versus a 12 month trading range between $10.42 to $17.57.

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