Small Caps | Aug 22 2024
Resource sector contractor Monadelphous has suffered from lithium weakness and the closure of a major project, but management is upbeat about the outlook.
-Lithium weakness and Albemarle closure hit Monadelphous
-FY24 results surprise to the upside
-New contract wins a highlight
-Opportunities across the spread of commodities and renewables
By Greg Peel
Monadelphous Group ((MND)) is a contractor to the mining and energy sectors, providing engineering & construction and maintenance services. The company's share price took a -12% hit at the end of July when Albemarle elected to close down its Kemerton lithium operation in Western Australia, leading to a loss of -$75-80m in revenues for Monadelphous as contractor.
The share price had already been gradually trending down all year, due to ongoing weakness in the lithium price feeding into weakness in sentiment, given Monadelphous' lithium exposure.
The market was relatively downbeat on the company heading into its FY24 result. The share price had decoupled from earnings correlation, Macquarie notes, and was pricing in downgrades.
Monadelphous delivered FY24 revenue growth in line with expectations, but an increased margin led to better than expected earnings. The higher margin segment of Engineering & Construction (E&C) beat consensus by 6%, with lower-margin Maintenance & Industrial (M&I) falling short by -2%, despite posting record revenues.
The final dividend of 33c came in well above forecasts, compared to 25c in the first half. The dividend beat is a positive signal in Macquarie's view.
Who Needs Kemerton?
The termination of the Kemerton project appears to be a distant memory for Monadelphous, suggests Citi, with recent contract awards more than offsetting its impact. Management appears optimistic around the near-term growth profile, particularly in E&C, noting project awards in the coming months are key to maintaining second revenue momentum.
Monadelphous has been awarded more than $3bn in contracts since the beginning of FY24, with major contracts in the energy, lithium, iron ore and renewable energy sectors.
No FY25 guidance was provided, which never pleases analysts, but for a company that is typically conservative, Citi finds outlook commentaries to be upbeat.
UBS was of the same mind, noting Monadelphous' upbeat outlook commentary points to a significant pipeline of opportunities across the resources and energy sectors, along with increasing expenditure related to decarbonisation.
Recent awards in iron ore, oil & gas and renewable energy should offset headwinds from lithium, UBS suggests, including Kemerton. Maintenance segment earnings should continue to be supported by high levels of production across commodities.
As at 30 June, the work-in-hand for E&C was $375m. Positively, says Morgans, Talison Lithium's CGP3 project is the only outstanding lithium project and with works well underway (20% completion) this seems unlikely to be cancelled. Over the last five years, the average revenue delivered in excess of the E&C work-in-hand at the start the year is $470m, Morgans notes, which implies some $850m revenue in FY25.
Since 30 June, another $540m of E&C awards have been announced. Some of these contracts are long-dated, Morgans notes, particularly at Woodside Energy's ((WDS)) Pluto LNG plant and Zenviron's Lotus Creek Wind farm, but they should help set E&C up for FY25 and FY26.
These contracts take E&C work awarded since the start of FY24 to $1.1bn, which is well above the $0.7bn revenue delivered in FY24.
An upcoming catalyst for the stock, Morgans notes, is further E&C awards which are "expected in the coming months". Thereafter, the catalysts will be further iron ore awards, with Monadelphous now confirming it has been involved as an early contractor on some of these projects. This may trigger some excitement, however, the broker's industry feedback suggests the major iron ore awards are some ten months away.
Additionally, gas & wind projects form part of the pipeline. On M&I, given the dominant market position in iron ore & energy (more than 70% share), revenue is expected to grow low single digit. Jarden notes the resources mix of maintenance work has shifted to oil & gas.
Jarden further notes that while management is no longer calling out "skilled labour shortages remain a challenge" as a headwind in its outlook statement, headcount disclosure appears broadly flat relative to the first half result.
While labour availability continues to remain a headwind, Monadelphous noted this has eased. This, in conjunction with increasing E&C topline contribution and easing inflationary pressure, should lead to sequential margin improvement, Citi suggests.
Meanwhile, high levels of construction activity have been flagged with momentum across a wide range of commodity groups all contributing to a robust pipeline of opportunities. This enables the company to be selective around opportunities it targets, meaning new work is likely to meet or exceed management's return and risk appetite thresholds, in Citi's view.
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