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Monadelphous Group: Sales soar 24 per cent, but I’m steering clear

What: Monadelphous Group Limited (ASX: MND) updated the market for sales revenue and earnings for the half year ended 31 December 2011.

Sales revenue is expected to be around $870m, and net profit for the half year is expected to be around $55m to $58m. The company stated that growth in revenues is likely to continue, with approximately $1.4 billion of new contracts announced in the last six months. Second half revenues are expected to be similar to the first half.

Managing Director Rob Velletri said “Continued strong demand from customers across all our markets and higher than expected levels of contract activity has resulted in this strong growth”.

The company
Monadelphous Group Limited offers engineering construction, maintenance and industrial services, electrical and instrumentation services, and Skystar airport services. The engineering construction services include fabrication and installation of structural steel, tankage, mechanical and process equipment and piping; multi-disciplined construction packages including civil and electrical disciplines; plant commissioning; specialist electrical and instrumentation and installation; fixed plant maintenance; shutdown planning, management and execution, and specialist concrete and structural maintenance.

So what: Monadelphous is my pick as the best of the mining services companies such as Leighton Holdings Limited (ASX LEI), Decmil Group Limited (ASX:DCG), RCR Tomlinson Limited (ASX:RCR), Mineral Resources Limited (ASX:MIN), Structural Systems Limited (ASX:STS) and Watpac Limited (ASX:WTP), to name but a few.

It has excellent management and an outstanding track record. Return on equity (ROE) has averaged a mightily impressive 67% over the last five years.

Net profits have grown every year since 2002 and earnings per share have grown by an average 11% over the last five years. The company has net cash of $130m (as at end of June 2011).

Trading on a forecast PE of 17, it’s not cheap (it’s a quality company and rarely offered at cheap prices), and is trading close to its 52 week high of $22.40. Forecast dividend yield is 5.1%, if the company maintains its current 87% payout ratio.

Now what: Monadelphous’ fortunes are tied to the commodities boom, but the company is expanding into servicing the Oil and Gas sectors. IF (and that’s a very big IF) the boom continues, there’s no reason why Monadelphous can’t continue to report record sales and profits year after year. For mine, I’m steering clear. Much as I would love to own this company, its too expensive at the moment and too dependent on China continuing to consume massive amounts of resources.

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 Motley Fool contributor Mike King does not own shares in Monadelphous. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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