The Monadelphous Group Limited (ASX: MND) share price is finally trending in the right direction after UBS upgraded its recommendation on the mining engineering contracting group.
The MND share price surged 5.1% to $15.54 in morning trade to become the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The new value buy
Monadelphous’ big gain is probably due to UBS after broker upped its rating on the stock to “buy” from “neutral” with a 12-month price target of $18.15 a share.
“Over the past 3mths the Monadelphous share price has declined c.20%. The stock is trading at a 1yr [forward] P/E of c.17x (UBSe), which is a 17% discount to the ASX200 Ind. (ex-fins), vs. a through cycle ave. discount of 3%,” said the broker.
“Our above consensus EPS forecasts are supported by a bottom-up analysis of the WA iron ore capex pipeline, and imply a 3yr EPS CAGR of 23%.”
Monadelphous is cum-consensus upgrade?
UBS is also confident about its bullish 20% plus sales growth estimates for the group as it transitions from LNG construction to iron ore mine replacement and sustaining projects. Monadelphous is a leader in the WA iron ore sector and holds around a 60% market share of the iron ore mine replacement projects.
“We expect Monadelphous to leverage this market strength as it pursues its share of a revenue pool that we think could equate to c.A$3bn across mine replacement and broader sustaining capital projects,” added UBS.
“Our updated analysis post the FY19 result indicates that up to 87% of our FY20e sales forecast may already be secured by long-term Maintenance contracts or Construction projects awarded through FY19 and FY20 (YTD).”
Possible cap raise
It’s also worth noting that Monadelphous could be a potential acquirer of assets. Downer EDI Limited (ASX: DOW), Cimic Group Ltd (ASX: CIM) and Lendlease Group (ASX: LLC) are believed to be preparing to divest their engineering businesses.
Depending on the timing of these spin-offs, potential buyers could get a good price for these businesses.
If the Monadelphous share price continues to surge ahead, it wouldn’t surprise me if the group undertook a capital raise to fund the takeover of some of these assets.
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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. The Motley Fool Australia has recommended Nearmap Ltd. 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 Scott Phillips.
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