There is plenty of opportunity emanating from the resources and energy sectors, but the cost-monster (labour) is chasing Monadelphous at the same time. Despite winning a bucket load of new contract work, the company is steering the market towards lower revenue in the second half year.
MND achieved 1H22 EBITDA of $60.9 million on a revenue increase of 12.3% over last year. Net profit of $30.1 million allowed the Board to declare an interim dividend of 24cps, unchanged on last year.
The big issue for MND is the availability and cost of labour across its projects and contracts, particularly in Western Australia, and this will persist for the next year or so. It is COVID-related and therefore temporary, but significant nonetheless. We note that many of the new contracts have a greater flexibility to price for and claw back higher labour costs. The re-opening of Western Australia’s state border and Australia’s international border will help to alleviate some of this pressure eventually.
The company guidance for a 5-10% drop off in revenue in 2H22f reflects project completions in 1H22 and the timing of new awards and contract extensions.
But the new work is indeed piling up. The company has secured almost $1.45 billion in announced new awards and contract extensions since the start of 2022 compared to $710 million in CY20. The company is pointing to the resources, energy, infrastructure and international markets as the source of the new work. Specifically, MND called out the Australian iron ore industry as very buoyant. The demand for battery metals (copper, cobalt, lithium, nickel) is another area receiving much attention.
At this stage, much of the new work is in the Maintenance and Industrial division which reported a record revenue in 1H22. We are expecting a stronger outlook for Engineering and Construction revenue from FY23f onwards. Rio Tinto, for example, is guiding its capex spend towards US$7.5 billion from CY21 onwards compared to lower outcomes in recent years. A resumption in capex from domestic oil and gas producers, such as Santos’ Barossa project in Darwin, are also gathering pace.
Investment view
The contracts and extensions are flowing back, albeit with some timing differences that will make FY23f the year to focus on. MND is vocal on the labour shortage issues, caused by temporary COVID disruptions, and this too shall pass. The underlying momentum in the resources, energy and infrastructure sectors should support MND earnings in the medium term.
Risks to investment view
Earnings would be at risk if MND was to lose a material volume of contracts. This type of work is subject to industry capital investment, so if this was to slow down, it could affect MND’s revenue.
COVID issues continue to present a meaningful risk if restrictions on people movement continues.
Recommendation
We have retained our (soft) Buy recommendation but are wary of short term cost issues.
