MND is an engineering group providing project management construction, asset management and maintenance services to the to the resources, energy and infrastructure industry sectors.
The attraction of this business is its long-standing reputation for successful project management, execution and delivery, which has enabled the company to forge solid long-term relationships with many blue chip companies including BHP, Rio Tinto and Woodside Petroleum.
Its strong track record has facilitated significant returns on invested capital, with return on equity averaging 56.7% for the past five years. The company is in excellent financial shape due to a net cash position on the balance sheet.
The greatest risk for MND would be a significant deterioration in market conditions. With falling commodity prices, a stubbornly high Australian dollar and political uncertainty, this has led to an increase in project cancellations and delays.
As a result, we believe a profit warning from the company is imminent.
We also feel however that any potential downgrades have been largely built into the current share price, which has fallen approximately 35% from its all-time high in February.
According to consensus numbers, MND is trading on 11 times 2014 earnings and paying a gross yield of 11.0%.
As we noted above, we feel these numbers are too optimistic. But, so long as any haircuts are modest in size, it will still prove to be one of the better yields on market, from a company that has a strong track record of above average earnings and dividends growth.
Given the uncertainty over its long-term outlook, the stock is only for risk tolerant investors with a short to medium time horizon.
We are happy to buy this stock on further weakness in the share price.
For more information on Monadelphous Group Limited (MND) please contact us on 07 4771 4577.