Why Monadelphous Group Limited’s share price is headed lower

Construction and engineering services company Monadelphous Group Limited (ASX: MND) is forecasting a tough few years ahead and it’s likely to see the share price fall further, as we warned in August.

The one-time market darling has seen its share price crumble from above $25 in 2013 to under $7.00 today.

Investors can forget about the company’s 13.6% trailing dividend yield at today’s share price of $6.78 too. Dividends have been falling consistently over the past few years as earnings fell, and they’re most likely going to fall again next year, and possibly again the year after.

With revenues in a steady decline since 2013, net profit and earnings are following, as the following tables and chart shows.

Full year FY12 FY13 FY14 FY15 FY16e FY17e
Revenues      1,897.5      2,617.5     2,329.6      1,865.0      1,608     1,448
Net profit          126.0          156.3         138.6          105.8            81           71
Earnings per share (cents)          142.4          173.0         150.4          113.9            87           76
Dividend per share (cents)          125.0          137.0         123.0            92.0

Source: Company reports. Forecasts from Reuters

Perhaps the most striking trend is when we look at each of the six-monthly periods. As you can see, revenues have been falling consistently – despite a brief respite in the six months to December 2014.

Half years Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
Revenues ($m)     1,289.3      1,328.2      1,277.9     1,051.7     1,052.0         813.0         732
Net profit ($m)           79.1            77.2            87.1           51.5           60.7           45.1
Earnings per share (cents)           88.6            67.7            94.9           43.7           65.4           48.5
Dividend per share (cents)           62.0            75.0            60.0           63.0           46.0           46.0

Source: Company reports. Forecast from company

If that trend continues, the full-year analyst consensus forecasts are far too optimistic, with revenues more likely to be around $1,400 million than $1,608 million in the 2016 financial year.

Speaking at the company’s AGM yesterday, Monadelphous managing director Rob Velletri said, “Australian market conditions continue to be competitive and are expected to remain challenging“. While that doesn’t seem to be overly negative, consider that in 2014, the company said it “expected some moderation of sales revenues” for the 2015 financial year.

Well, the results are in, and revenues plunged 20%, suggesting 2016 financial results aren’t going to be pretty. Mr Velletri says the company anticipates revenues being 10% lower than the second-half of FY15 (hence the $732 million forecast).

Capital expenditure in the mining and resources industry is not expected to hit bottom until 2017 – and likely to impact negatively on Monadelphous’ results until then.

The problem for Monadelphous and many other mining services companies was that they turned to the oil and gas sector as the saviour following the end of the mining boom. But oil prices crashed, exploration and development has come to a screaming halt, while several billion-dollar LNG projects have either completed, or are expected to complete within the next few years.

Monadelphous, like many others, has been forced to slash expenses to the bone – which should stand it in good stead when the cycle turns – but hasn’t been able to prevent earnings falling.

Foolish takeaway

In a sector where companies fail to achieve any competitive advantage, Monadelphous has shown itself to be by far the best company, achieving outstanding returns on equity and solid margins. But even the best will struggle when their industry is going through so much pain like it is now.

The time to buy shares in Monadelphous is not upon us just yet, despite the apparent cheap price and whopping dividend yield. Both are likely to fall.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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