Why the decline?

Hi All,

Reading the prior posts there seems to be a lot of commentary regarding the recent steady decline in the share price of MND. Looking into past performance and the current outlook reveals some significant changes underway in revenue streams, as outlined by the two maps in the AGM presentation. The first image (slide 14) shows activity in FY2015, the second (slide 23) shows activity to date H1 FY2016, minus the recent two maintenance contract wins. Note the red dots are construction contracts, with the blue dots as maintenance contracts.

What I see is a company transitioning from construction-related contracts to maintenance contracts. Considering the current outlook for the oil and gas industry, with companies reigning in capex, the construction arm of MND appears to be really struggling. MND received 82.7% of construction revenue from O&G, Coal and Iron Ore in FY2015, with the remaining 17.3% from infrastructure. This is significant exposure to three sectors which are in unprecedented decline.

Although the company has announced over $800m of contract wins this year, they are mainly 2-7 year contracts and it is difficult to determine the distribution of revenue through the years. Revenue from maintenance contracts in FY2015 was around $600m, representing 1/3 of total revenue. Management have flagged a 10% reduction in total revenue for H1 2016 (compared to H2 2015), which (assuming maintenance revenue is steady) actually translates to a 15% reduction in construction revenue, representing the ongoing deterioration of the construction business.

For me, the deterioration of the construction business is the real reason for the steady decline in the share price. The lack of new contract wins, coupled with the outlook for construction in O&G, Iron Ore and Coal tells the story.

However, the silver lining is that taking into consideration the net cash position of $180million, the underlying company is valued at around $370m. Taking a wild guess at FY2016 revenue, I reckon it will be in the order of $1.5b (representing perhaps $600-$700m maintenance, $800-900m construction) coupled with minimal restructuring costs should give a healthy NPAT. Historically NPAT margin has been around 5-6%, so NPAT FY2016 would be around $80m in this case. Dividends are usually 81-82% of NPAT, which equates to a 68c combined annual dividend (11.8% gross yield).

I think management has been a bit slow off the mark to diversify out of O&G and mining, and the cash pot could be put to better work via acquisitions of small-medium sized infrastructure-focused engineering firms. However, a strong focus on winning maintenance contracts could see MND re-rated (alongside a significant construction contract win).

I'm buying at these levels.

That's my two cents anyway.