A Fresh Upgrade Cycle For Monadelphous?

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In a solid climate for Engineers & Contractors, Monadelphous’ FY26-27 growth potential stands out, supporting a seemingly rich valuation.

-Monadelphous’ FY25 result beats consensus
-Strong growth forecast for FY26-27
-Iron ore, oil & gas and renewables to drive growth
-Some analysts are predicting a new upgrade cycle coming

By Greg Peel

It was a positive August results season for the Engineering & Contracting sector servicing the resources industries. Macquarie highlights solid demand, earnings margin beats, strong balance sheets, with a number of share buybacks underway, and positive forecast earnings revisions for FY26-27.

A focus on revenue quality, improved terms & conditions and rational market behaviour is contributing to improved margins. A key theme for Macquarie is breadth of end-markets demand, featuring strong stay-in-business iron ore activity and renewables demand now arriving (transmission and electricity infrastructure). Domestic exposures are outperforming global.

For Citi, two Engineering & Contracting companies stand out from the pack; NRW Holdings ((NWH)) and Monadelphous ((MND)).

While Monadelphous’ recruitment activity is back above its historical monthly average, NRW’s job postings are still tracking below their long-term average, Citi notes. However, both enjoy robust order books and pipelines that are beginning to crystallise.

While skilled labour continues to be tight, Monadelphous and NRW have been successful in retaining their talent and continuing to build on their solid near-term top-line visibility. The industry is fast approaching an inflexion point, Citi believes, when it comes to large project awards which have been delayed for a myriad of reasons, such as cost pressures and regulatory headwinds.

For NRW, Citi believes positive momentum should continue but Monadelphous could be on the cards for potential step-change. Recruitment from here on will depend on large project awards and we could be entering a period of heightened hiring spree sooner rather than later.

FY25 Good

Monadelphous delivered a solid FY25 result, with earnings 4% ahead of consensus and profit 6% ahead. The stronger than expected result was driven by better than guided revenue growth. FY25 revenues increased by 12%, which was ahead of the company’s guidance for high single-digit growth and consensus of 9%.

For the purpose of underlying numbers, Morgans has stripped out an earnings benefit from insurance proceeds in first half and left in the benefit from FX. This implies normalised earnings up 19% year on year. Earnings margins were strong, Morgans notes, at 6.71%, which is up 43 basis points on FY24.

Normalised profit was up 28%. The second half fully franked dividend was up 18% year on year, taking the full year dividend up 24%, with the company paying out 90% of profit as is customary.

FY26 Better

Looking into FY26, Monadelphous did not provide quantitative revenue growth guidance, but did speak to its confidence in delivering earnings growth in the year ahead. Analysts expect the company will provide formal guidance at the company’s AGM in November.

Monadelphous’ outlook commentary points to a strong pipeline of committed work in FY26, with $2.7bn in contracts secured in the energy and resources sectors, along with significant prospects related to decarbonisation.

UBS forecasts FY26 revenue growth of 6% (up from 4% previously). Within this, UBS expects Monadelphous’ Engineering & Construction (E&C) business to deliver 9% growth (up from 5%), supported by recent awards in oil & gas and elevated commodity production levels.

The company’s Maintenance & Industrial (M&I) segment revenues should be supported by ongoing demand from the energy sector. UBS forecasts first half FY26 revenue growth of 13% given an increased oil & gas maintenance turnaround outlook. The broker highlights an increased workforce (up 25% versus the first half FY25), order book (up 22%) and book-to-bill (1.2x) as factors that support the growth outlook.

Monadelphous is more confident than normal regarding its outlook, Macquarie finds, noting it is “positioned for growth in FY26”. Stay-in-business iron ore and oil & gas continue to be prospective, and the company is increasingly seeing work across renewables, as the long-awaited spending boom from the energy transition arrives.

M&I saw a second half rebound (revenues up 14% year on year) after a softer first half. Monadelphous expects a heavy turnaround schedule in the second half FY26, which should drive strong growth. Macquarie notes a number of recent contract awards across the energy sector (particularly in LNG).

The order book in E&C is around $570m to start FY26, which is $91m more than Morgans’ original estimate. Using history as a guide, this indicates E&C revenue for FY26 is likely to be between $1050-1170m, Morgans estimates, versus consensus beforehand of $956m.

Morgans sees risk as skewed to the upside, supported by Rio Tinto’s ((RIO)) Pilbara replacement program, with a catch-up in spend expected in the second half of 2025 and strong forecasted spend in 2026 and 2027. Monadelphous’ E&C revenue has historically had a strong correlation with Rio’s Pilbara capex spend.

The other positive takeaway for Morgans is we’re now seeing a revival of oil & gas construction work. Both Chevron’s Jansz-Io compression project and Woodside Energy’s ((WDS)) Pluto 1 modifications project are well underway, with the hook-up and commissioning of Shell’s Cruz platform recently awarded.

Oil & gas work is generally higher margin, Morgans points out, which means, subject to execution, Monadelphous has capacity to surprise to the upside on margins.

Industry conditions remain supportive, Jarden suggests, given strong demand and lessening headwinds from costs.

When assessing the potential outlook for earnings margins, Jarden is confident further accretion could be ahead given: 1) no major ramp-up costs expected for contract mobilisation in E&C works; 2) a commitment to continued earnings margin improvement from management, especially as it relates to labour productivity and on-site performance; and 3) management commentary that labour market conditions remain steady, albeit tight, with the lack of apparent volatility easier to price into contracts.

Too Rich, Surely

Monadelphous’ shares have performed strongly this year, and were up around 50% year to date heading into the FY25 result. The combination of a sustainable double-digit earnings per share growth outlook, order book growth leveraged to domestic projects, and minimal global tariff exposure are factors that have supported the stock, UBS suggests.

That left the stock trading at a one-year forward PE of 24x, which is tracking to the upper end of its long-term trading range of 25x, reflecting the double-digit (and domestic) EPS growth outlook.

UBS sees the AGM in November as a potential positive catalyst, assuming the company is likely to provide first half revenue growth guidance, but for now UBS retains a Neutral rating.

Bell Potter also saw Monadelphous’ valuation as rich, heading into the FY25 release with a Sell rating.

Even with the material earnings forecast upgrades post the result, on a more optimistic FY26-27 outlook for E&C and M&I, Bell Potter continues to see a dislocation in fundamentals and sentiment, with the latter driving valuation multiples to prior cycle-peak levels, as UBS notes.

Bell Potter will wait to see if momentum builds for contract wins in the renewable energy generation, storage and transmission sector, which the broker believes is needed to complement rising demand for sustaining capital works, to offset a slowdown in greenfield project development across resources and energy.

On that basis, Bell Potter upgrades to Hold from Sell.

The upgrade cycle for Monadelphous is in full swing, Morgans acknowledges. Although the shares have re-rated materially, Morgans continues to like the stock given significant growth potential in both FY26 and FY27 driven by Rio’s multi-year iron ore replacement program (underpinning strong demand in E&C) and heightened oil & gas turnaround activity in FY26 and FY27 (increasing volumes in M&I).

Although the headline valuation looks stretched, it’s important to note Monadelphous reached circa $20 per share pre-covid in anticipation of Rio’s initial iron ore replacement program. Not only does Rio’s replacement program appear more significant this time around, the higher value M&I business is now 30% larger.

Material outperformance for Monadelphous was always going to hinge upon its ability to recapture pre-FY20 margins, Morgans suggests. The first and second halves of FY25 demonstrated the margin leverage in E&C, which looks set to continue, and positions the company well for an upgrade cycle.

Morgans upgrades to Buy from Accumulate.

While Monadelphous’ FY25 profit beat consensus by 6%, it met Macquarie’s forecast. Macquarie’s FY26 earnings per share forecast is now 9% above pre-result consensus, and the broker sees potential and catalysts regarding near-term contract awards and strong first half revenue guidance at the November AGM.

Macquarie retains Outperform.

Monadelphous’ decision to provide qualitative outlook commentary for FY26 at the full year result reinforces improving near-term topline revenue visibility and expectations of not only replenishment but growth in its order book balance, Citi suggests. As is always the case, there is a question around valuation and earnings yield, but Monadelphous could be in for an upgrade cycle starting on or even before the AGM in three months’ time, in Citi’s view.

On that basis, Citi applies a high valuation multiple to the stock, and post-result upgraded to Buy from Neutral.

That leaves three Buy or equivalent and two Hold ratings among the five brokers monitored daily by FNArena covering Monadelphous. Post the FY25 result, the consensus target has risen to $22.13 from $18.16.

Jarden maintains an Overweight rating and lifts its target price to $21.50 from $18.60 following: changes to earnings forecasts; a moderation in long-term capex forecasts in line with company commentary; and a change in Monadelphous’ share price influencing Jarden’s capital structure assumption (remaining net cash).

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