Monadelphous share price headed for 10-year lows

Monadelphous Group Ltd (ASX:MND) likely to see share price head even lower

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Monadelphous Group Ltd (ASX: MND) could see its share price hit its 10-year low of $4.66, if current trends continue.

In mid-afternoon trading, Monadelphous's share price is down 3% to $5.84 compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down just 0.2% for the day.

By current trends, I mean falling commodity prices, including energy. And that's despite winning a number of new contracts of late, including Shell Australia's Prelude Floating Liquefied Natural Gas project (FLNG) worth more than $200 million, and a two year contract for services on the North West Shelf's Karratha Gas Plant, operated by Woodside Petroleum Limited (ASX: WPL).

The key problems Monadelphous faces are:

  1. Both minerals and energy commodities prices are falling, forcing miners to drastically cut costs and the company has exposure to both
  2. The commodities crunch also means less explorers are active, which will have an impact in later years, when old projects mature, and there's no new projects to replace them with.
  3. Contract margins are being squeezed, with mining services companies lucky enough to win contracts likely doing it at very close to cost price – if they are lucky.
  4. Mining services companies, desperate to stay alive may well underbid contracts just to get the work.
  5. If the resource companies can't cut costs enough, resources and energy projects will be forced to close, or suspend operations like BC Iron Limited (ASX: BCI) was forced to do today. That means less clients and less work.
  6. Winning new contracts is a good sign for a contractor like Monadelphous, but even if the company provides the estimated value of the contract, that doesn't necessarily mean it will be profitable.
  7. Resources and energy capital expenditure is forecast to continue falling into 2017, before staging a recovery in 2018.
  8. Monadelphous says first half revenues are expected to be down 10% for the six months to end of December 2015 on the six months to June 2015.

Markets don't always act rationally, and we could see a period where prices for commodities mean virtually every miner is making a loss. They in turn will turn the screws on their contractors.

Foolish takeaway

Monadelphous has proven itself to be the standout mining services contractor over the past decade or more thanks to strong returns on equity and earnings growth. Unfortunately for shareholders, that's no longer enough, with the whole sector negatively affected by less work and lower margins.

Look out below.

Motley Fool writer/analyst 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »