Australia | Nov 23 2011
– Monadelphous delivers positive AGM commentary
– Brokers lift earnings estimates and price targets
– Valuation keeps broker opinions divided
By Chris Shaw
Tough operating conditions mean an acceleration in revenue growth is not common among ASX listed stocks at present. One stock to buck this trend is Monadelphous ((MND)), one of the leading structural and mechanical contractors to the resources sector.
AGM commentary from Monadelphous yesterday indicated at least 15% revenue growth should be achieved in FY12. UBS notes solid margins should also be maintained, which indicates management are not being forced to cut margins to generate this growth in revenues.
The revenue growth expectations of management are better than the 12.9% growth UBS had been forecasting. This has prompted the broker to lift earnings per share (EPS) estimates by 2% through FY14.
Others in the market have reacted similarly, JP Morgan increasing its EPS estimates by 2-4% through FY14 and Deutsche Bank lifting its profit forecasts by 5% for FY12 and by 7% for FY13. Macquarie's estimates have increased by a similar amount to Deutsche Bank.
Consensus EPS estimates for Monadelphous according to the FNArena database now stand at 121.5c for FY12 and 142.3c for FY13.
The changes to earnings forecasts have seen similar adjustments in price targets. JP Morgan's target increases 40c to $15.77 and UBS has lifted its target to $21.25 from $20.75. Macquarie makes the largest increase in price target to $19.83 from $18.82, while Deutsche has increased its target by 70c to $20.70.
The consensus price target according to the database now stands at $20.13, up from $19.61 prior to the AGM update. Targets ranging from JP Morgan at $15.77 to RBS Australia at $23.09.
Despite increases to forecasts and price targets, opinions on Monadelphous remain mixed. UBS continues to rate the stock as a Buy, expecting the combination of strong cash flows, triple digit returns on capital, a net cash position and a strong earnings outlook will continue to deliver share price outperformance. This should be achieved despite a valuation premium in UBS's view.
Deutsche Bank estimates at current levels Monadelphous is trading at a 35% premium to the mining services sector average. As a result, while offering one of the better quality exposures to the sector and potentially a longer cycle than others, Deutsche sees the solid earnings outlook as already priced into the stock. Macquarie similarly rates Monadelphous as Neutral.
JP Morgan is at the other end of the spectrum, taking the view the current valuation of Monadelphous factors in all the potential upside of solid earnings growth expectations and a strong financial position but doesn't account for any of the risks such as shortages of skilled labour impacting on operations.
For JP Morgan there is better value exposure to be had via the likes of UGL ((UGL)) and Ausdrill ((ASL)), meaning an Underweight rating on Monadelphous has been retained. Overall, the FNArena database shows Monadelphous is rated as Buy twice, Hold twice and Underweight once.
Shares in Monadelphous today are slightly weaker and as at 11.35am the stock was down 3c at $19.27. This compares to a trading range over the past year of $15.30 to $22.40. The current share price implies upside of around 4.6% to the consensus price target in the FNArena database.
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