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Transfield Services Limited rallies 17%: Is there room to run?

Monday morning is off to a flying start for shareholders in Transfield Services Limited (ASX: TSE) after shares in the operations and maintenance provider rallied around 17% by 11am.

The cause of the share price spike was an announcement this morning that Transfield had received a formal Letter of Intent from the Government for the award of a 20-month contract to provide Garrison and Welfare Services on Nauru and Manus. The contract is valued at a staggering $1.22 billion.

Meanwhile engineering group Monadelphous Group Limited (ASX: MND) has just come out of a trading halt after the release of details surrounding a $680 million contract win for mechanical works on the Ichthys Project Onshore LNG Facilities in Darwin. Its shares are up 6.5% in response.

Foolish takeaway

While major contract wins are generally positive for contractors there are two important points for investors to remember. Firstly, contractors need to regularly win new contracts just to keep their pipeline of work consistent as older contracts come to an end. Secondly – and this is particularly important now that the ‘boom-time’ mining period is over – contracting work historically has a very low margin and is not without risks. As such, a seemingly small blow-out in costs can wipe out the profitability of a project.

In Transfield’s case, this would appear to be an impressive win for the group but it is not without its risks. However with the share price still down around 50% in the past 12 months, there could be a margin of safety between price and value.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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