Why is Monadelphous Group Limited up 20%?

Monadelphous Group Limited (ASX: MND) was one of the hardest hit by the slowdown in mining construction spending that smashed mining services companies in 2013. Between February and May 2013 Monadelphous shares plunged nearly 50% from just under $28 to below $15.

Earnings downgrades were the prime reason for the share price fall in 2013 as contracts were cancelled and dried up with miners under pressure to cut costs. Analysts expect the industry slowdown to result in a 18% fall in net profit between FY13 and FY14 to around $130 million. This should result in an earnings per share of around 140 cents and a dividend yield of over 6% based on an 83% payout ratio, which is in line with previous years.

New Contracts

Since reaching a low of $14.63 in late 2013, the share price of Monadelphous has recovered well to hit $18.90 following a 20% rise in the last three months. The rise is primarily due to three new contract awards to the value of $1 billion on two Australian LNG projects.

The contract wins are important for two reasons: 1) it shows that Monadelphous remains competitive in a lower-spend environment, and 2) that the company should be able to compensate for fewer iron ore contracts with more LNG contracts.

Looking ahead

Monadelphous’ strong market share and reputation within the industry is expected to result in recurring contract awards with the major LNG projects in order to sustain net profit above $100 million in the coming years.

Monadelphous is also focussing heavily on maintaining or improving margins though cost cutting and efficiency gains. The market appears to be factoring in much improved growth in 2015 and 2016 but with few new major projects coming online and existing projects coming to an end, Monadelphous may find it difficult to strongly grow profit in the near term.

Time to buy?

I’d suggest that the easy gains are gone for now. Monadelphous is trading on a forward price to earnings ratio of around 14, which is relatively high for the sector, and earnings are only expected to fall in the coming years. Should we see a pullback in the price, Monadelphous could well provide investors with good exposure to the strong LNG sector.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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