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Should you buy Monadelphous Group Limited at this share price?

The Monadelphous Group Limited (ASX: MND) share price will be closely watched this week as the construction and engineering services giant hands down its half-year 2017 results.

Although Monadelphous’ shares have rallied a massive 77% from this time last year, I believe Tuesday’s results make it a good time to take profits. Here’s a summary of why.

  • Sales revenue fell 14.4% on prior corresponding period (HY15) to $630.7 million
  • Net profit after tax (NPAT) was down 24.1% on HY15 to $28.6 million
  • Interim dividend down 14% on HY15 to 24 cents per share
  • Half-year earnings per share came in at 30.5 cents per share
  • Approximately $700 million of new contracts awarded in the half

So what?

In my opinion, Monadelphous’ half-year results are poor.

As I explained here, a broad-based rally in commodity prices and unprecedented infrastructure spending has benefitted most mining and construction services contractors – especially the likes of CIMIC Group Ltd (ASX: CIM) and Downer EDI Limited (ASX: DOW) (who operate in both sectors).

However, this upside does not appear to have flowed to Monadelphous (as much) given its reliance on the underperforming energy market.

Although Monadelphous’ results were in-line with previous guidance, the disappointing aspect is that there was no revenue or NPAT growth on last year’s corresponding figures.

Given the company trades on a lofty price-earnings of about 18.5x and dividend yield of 5.9% (assuming full-year earnings and the final dividend is maintained), investors are likely to demand more from a company of Monadelphous’ ilk and are right to be underwhelmed by its half-year results.

Accordingly, whilst its shares are up over 4% in early trade, I believe the rally could be short-lived.

Should you buy?

Monadelphous is taking steps to divest its earnings base into water infrastructure, minerals processing and industrial maintenance services. However, Tuesday’s half-year results show that those strategies are barely enabling the company to keep its head above water with the latter industrial services division being the only one to report headline sales growth of 19%.

Though the company continues to win new work and expand into new areas, I still believe there’s plenty of downside risk associated with the company and would prefer to take profits following the stock’s recent rally.

Foolish takeaway

Investors holding Monadelphous’ shares have likely enjoyed solid gains over the last 12 months given the strong share price rally.

Nevertheless, Tuesday’s mediocre results support my view that the current share price of $11.80 (based on Monday’s close) does not justify the downside risks associated with Monadelphous’ reliance on the cyclical energy and resources markets.

Accordingly, I’m inclined to take profits and sell the stock based on Tuesday’s results.

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Motley Fool contributor Rachit Dudhwala owns shares of Monadelphous Group Limited. 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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