Dividend Portfolio: 2017 Income Stock

Overview: Monadelphous Group Limited (“Monadelphous”, “the Company”) is an Australian engineering services company. It is engaged in providing construction, maintenance, and industrial services to the mining, energy, and infrastructure sectors throughout Australia. MND has two divisions: Engineering Construction and Maintenance and Industrial Services. Our last advice was a ‘buy’ recommendation on 13 July 2016 at $8.47.

Catalysts: Monadelphous Group has a strong order book and has been awarded an additional $700 million of new contracts during the first half of FY17. The Company has a strong footprint in its core markets and management seeks to expand its services into new and existing markets, which could drive growth if successfully executed. The company has a strong balance sheet with net cash of $226.2 million and debt of less than 1x EBITDA.

Hurdles: During the past three years, challenging conditions have resulted in declining revenue and earnings and Monadelphous was forced to reduce dividend distributions. There is no guarantee that this trend won’t continue despite the improved order book. The company is subject to economic activity in the mining and construction sector and adverse conditions may aggravate risks of fewer new order flows or deferral of existing contracts.

Investment View: Monadelphous Group offers profitable exposure to demanding engineering services in the resources, energy, and infrastructure sectors. We are attracted to the company’s order book, balance sheet, and diversified income profile. The primary risks are associated with general economic conditions in the construction and resources sector, which may adversely impact Monadelphous operations. With many of its contracts spanning over several years and interest building up, Monadelphous may be at an inflection point to return to dividend growth following several years of contraction. The Company is forecasted to pay a full-year distribution yielding ~4.5%. We reiterate our ‘buy’ recommendation.

Dividend Portfolio

Overview: Monadelphous Group Limited (“MND”, “the Company”) is an Australian engineering services company. It is engaged in providing construction, maintenance, and industrial services to the mining, energy, and infrastructure sectors throughout Australia. MND has two divisions: Engineering Construction and Maintenance and Industrial Services.

Hurdles: MND’s revenue has declined for the past two consecutive years and its long-term performance is dependent on increasing levels of investment in the mining and energy sector. A further slowdown in global economic conditions with adverse impact on coal, iron ore, and LNG demand, would aggravate the risks of fewer new order flows or deferral of existing contracts.

Catalysts: MND is well placed to benefit from a recovery in the depressed mining services sector. Backed by its diversification into the marine infrastructure sector and cost restructuring measures, MND’s results are projected to be less impacted by the cyclical downturn. Most key commodity prices have recovered year-to-date which should enable management to reward shareholders via attractive dividends. The FY16 dividend distribution is estimated to yield ~$7%.

Investment View: MND is strategically placed to leverage from any recovery in mining investments. We are attracted to its long-term earnings growth record, free cash flow profile, and management’s interest in driving shareholders’ return. Whilst the near-term outlook for the metal and mining sector looks challenging, MND is well placed to benefit from any cyclical recovery. The stock is trading at an undemanding valuation and we estimate a dividend yield of ~7% and with a resilient business model of the diversified revenue base, we initiate coverage with a ‘buy’ rating.