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Monadelphous Sees Tender Pipeline Evaporate; Earnings Struggle

Written by on May 29, 2013

The mining service sector has been beset by earnings downgrades, with UGL, WorleyParsons and Transfield Services lowering earnings expectations in recent days and providing details of an industry facing strong headwinds. In February, after Monadelphous announced a 38% increase in first-half net profit after tax (NPAT) and confidently upgraded full-year revenue expectations to growth of 35%, analysts increased forecasts and fair value on higher longer-term sales growth assumptions. Monadelphous holds a strong position in provision of structural, mechanical, piping electrical and instrumentation work to the domestic iron ore and liquefied natural gas (LNG) sectors.

Long established relationships with major mining and energy companies have been leveraged into recurring maintenance and industrial services contract work. However, in the past two months, commodity price volatility, uneven economic conditions, reduced investment and a stronger cost containment focus from the mining companies have resulted in deferred projects, scope reductions, cancelled contracts and increasing competition across the industry. The outlook beyond fiscal 2013 appears to be rapidly deteriorating as the largest mining companies plan substantial cuts to capital and operating expenditure during the next two to three years.

Analysts forecast fiscal 2013 NPAT is lowered by just 3% to AUD 156.4 million, but fiscal 2014 is lowered by 22% on a reduced tender pipeline. Morningstar has adjusted its longer-term growth and margin forecasts downward to reflect the new lowgrowth, low-margin environment for contractors to the mining and energy industry.

Since being awarded a AUD 260 million iron ore construction contract for Rio Tinto’s Western Turner Brockman project, in late February, Monadelphous has not announced any further engineering contract wins or contract extensions. The main risk to Monadelphous’s business model is the company’s dependence on increasing levels of mining and energy sector capital investment to drive the tender pipeline for engineering revenue growth.

Another area of concern surrounds the impact of project cancellations, scope reductions and fluctuating demand from large mining companies on Monadelphous’s operations and maintenance business. In the six months to March, stronger operations and maintenance tender activity from the energy sector has been largely offset by weaker demand from the mining sector. The significant slowdown in contract work from the mining sector and only limited growth in energy sector maintenance work is now looming as a key growth issue for Monadelphous.

Fortunately, Monadelphous has maintained a strong balance sheet, without resorting to equity raising, unlike many of its peers, and in early January 2013 held a net cash position of AUD 126.3 million. Capital expenditure is predominantly funded from operating cash flow or by using off-balance sheet operating lease financing. At the end of first half fiscal 2013, Monadelphous’s bank guarantees and performance bonds increased by 50% to AUD 383 million, largely in line with the increase in contract work, but further extensions to the facilities may prove difficult to achieve in the current challenging environment.

In fiscal 2014, many of the mining and energy projects will be nearing completion and Monadelphous will be faced with a less robust tender pipeline, looking for the next wave of large-scale mining and energy construction projects. The shortage of work will result in an even more highly competitive tendering environment, impacting margins.



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